PAPER NO. 90 E N V I R O N M E N TAL E C O N O M I C S S E R I E S A Critical Review of the Literature on Structural Adjustment andtheEnvironment Anna Gueorguieva and Katharine Bolt April 2003 THE WORLD BANK ENVIRONMENT DEPARTMENT A Critical Review of the Literatureon StructuralAdjustment and the Environment Anna Gueorguieva and Katharine Bolt April 2003 Papers in this series are not formal publications of the World Bank. They are circulated to encourage thought and discussion. The use and citation of this paper should take this into account. The views expressed are those of the authors and should not be attributed to the World Bank. Copies are available from the Environment Department, The World Bank, Room MC-5-126. The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. Manufactured in the United States of America First printing April 2003 Contents ABSTRACT v ACKNOWLEDGMENTS vii ABBREVIATIONS ix Chapter 1 Introduction 1 Chapter 2 General Approaches 3 2.1 Approaches for Evaluating Effects of SAPs on the Environment 3 2.1.1 Strategic Environmental Assessment (SEA) 3 2.1.2 Village-Economy-Wide Model 6 2.1.3 Social Dimension 6 2.1.4 Second-Best Theory 6 2.1.5 Four-Dimensional Analysis 8 2.1.6 Accounting for Chaotic Effects 8 2.1.7 Computable General Equilibrium (CGE) Models 9 Chapter 3 Sectoral Analyses 11 3.1 Agriculture 11 3.1.1 Substitution Effects 11 3.1.2 Income Effects 12 3.1.3 Land Prices and Tenure 12 3.1.4 Agricultural Credit 13 3.1.5 Full Effects of Structural Adjustment 14 3.2 Forestry 15 3.3 Water Sector 17 3.4 Wildlife-based Sector 18 3.5 Energy 18 3.6 Urban Environment 20 3.7 Public Sector Reform 21 3.8 Governance 22 Environmental Economics Series iii Indicators of Environment and Sustainable Development -- Theories and Practical Experience Chapter 4 Effects Through Indebtedness and Economic Liberalization 25 4.1 Debt and the Environment 25 4.2 Liberalization and the Environment 26 4.2.1 Pollution Haven Hypothesis 26 4.2.2 Estimation of the Effects of Changed Scale and Structure of the Economic Activity Using CGE Models 27 Chapter 5 Conclusion 29 5.1 Difficulties in studying the environmental effects of SA 29 5.2 Lessons on How to Reduce Negative Environmental Impacts 30 AppendixA Theoretical Linkages Between Structural Adjustment Instruments and Effects on the Environment 35 AppendixB Sectoral Analysis of the Impact of Liberalization on Agriculture 41 AppendixC Country Case Studies 43 C.1 World Bank Studies 43 C.2 WRI and WWF Studies 44 REFERENCES CITED 51 ADDITIONAL REFERENCES 56 BOXES 1 Structural Adjustment Defined 2 2 The Energy Sector in Transitional Economies 20 3 Good Practice of Institutional Development in World Bank Loans 23 CHARTS 1 Excess energy consumption 20 TABLES 1 Theoretical channels through which SAPs influence environmental conditions 4 iv Environment Department Papers Abstract This paper analyzes the available literature are strongly influenced by what is examined, about the effects of structural adjustment the sectoral level, and the stage of the SA programs (SAPs) on the environment and the process. The infrequency of high-caliber convincing evidence for their success or studies is due to data scarcity and statistical failure. The studies covered refer to the SAPs limitations. by the World Bank as well as to general There is little reason to doubt, however, that government programs that have similar policy over the longer term, the sorts of changes in implications. SAPs are designed to reform incentive structures and relative price changes economies to become more liberalized and brought about by SA lending will have an export-oriented while reducing the role of impact on the environment. Economies governments that have become inefficient undergoing SA will experience both growth bureaucracies. Because of the implications of (assuming the success of SAPs) and structural policies such as debt accumulation and trade, a shifts, which will affect the extraction of concise literature review on debt and trade natural resources and the level of pollution liberalization is also included. emissions. The evidence presented in the Despite the controversy surrounding structural studies reviewed highlights that the net effect adjustment and the environment, the debate of SAPs on the environment has been varied: has been largely based on anecdotal evidence sometimes positive and at other times and country case studies. Most of the studies negative. The papers surveyed emphasize the reviewed are not quantitative and have not difficulty in generalizing about the direction applied rigorous statistical methods. The and magnitude of these environmental conclusions of studies on the effects of impacts, as the linkages are complex and case structural adjustment (SA) on the environment specific. Environmental Economics Series v Acknowledgments The authors would like to thank Kirk Hamilton Cynthia Allen who helped edit the report. All for his support throughout this project and remaining errors are ours. Ksenya Lvovsky, Muthukumara Mani, Tim Anna Gueorguieva may be reached at: Taylor, Ken Greene, and Olivia Cowley for University of California, Berkeley. E-mail: their useful comments. We are indebted to anna@are.berkeley.edu. Environmental Economics Series vii Abbreviations CENDES Simulation Model of the Venezuelan Economy CGE computable general equilibrium DSM demand-side management GDP gross domestic product GHG greenhouse gases IMF International Monetary Fund LRMC long-run marginal effect SA structural adjustment SAL structural adjustment loan SAP structural adjustment program SEA strategic environmental assessment SECAL sectoral adjustment loan WRI World Resources Institute WWF World Wide Fund for Nature Environmental Economics Series ix 1 Introduction The inception of structural adjustment criticism from some parties regarding its social programs (SAPs) followed the oil crisis of the and environmental impacts. The focus of this 1970s, the deepest global recession since the paper is the impact that SAPs have had on the Great Depression, and the developing-country environment. SA critics argue that SAPs debt crisis of the 1980s. With many of the promote increased resource use, thus world's economies floundering, the first undermining sustainability as a country has structural adjustment loan (SAL) was little capacity to protect the commons, which implemented in February 1980. SAPs aim to results in excessive exploitation. The restore economic growth through stabilization proponents of SA have stressed the "win-win" in the short run and adjustment in the medium potential of SAPs because by removing term. They are utilized by several of the distortions and enhancing productivity international financial institutions, most efficiency, SA should reduce resource wastage. notably the World Bank and IMF, but also some This should at least in part compensate for any of the regional development Banks including movement into the competitive-advantage the Asian Development Bank and African sectors that are resource and/or labor Development Bank. intensive in low-income countries. If SA increases prosperity, that will promote greater While SALs are linked to programs of interest in environmental protection and economic and policy reforms, sectoral create resources to finance the protection. adjustment loans (SECALs) are linked to sectoral reform programs. The main Both arguments are reasonable on a priori instruments of adjustment are changes in grounds, so it is possible that SA will have taxes, tariffs, quotas, subsidies, price controls, negative and positive impacts. Determining public expenditure, and trade reforms. the net impact of SA is an empirical issue. The Recently governance, private sector net effects of SAPs on the environment have development, and deregulation reforms have been varied: sometimes positive and at other been important elements of SA. These policies times negative. It is difficult to generalize are designed to promote a more open, about the environmental impacts resulting competitive economy with fewer distortions, from SAPs because the linkages are often thus easing the response of the private sector to complex and tend to be case specific. Pandey less distorted or undistorted market signals. and Wheeler (2001), Dixon, Simon, and Narman (1995), and Panayotou and Hupe The economic success of structural adjustment (1996) suggest that the conclusions of their (SA) has been patchy, and it has faced heavy studies are highly dependent on the geographic Environmental Economics Series 1 A Critical Review of the Literature on Structural Adjustment and the Environment Box 1. Structural Adjustment Defined Structural adjustment loans (SALs) provide quick-disbursing assistance to countries with external financing needs to support structural reforms in the economy as a whole. Sectoral adjustment loans (SECALs) support reforms that are limited to a specific sector. Adjustment operations generally aim to: · Promote competitive market structures · Correct distortions in incentive regimes (taxation and trade reform) · Establish appropriate monitoring and safeguards (financial sector reform) · Create an environment conducive to private sector investment (judicial reform, adoption of a modern in- vestment code) · Encourage private sector activity (privatization and public-private partnerships) · Promote good governance (civil service reform) · Mitigate short-term adverse effects of adjustment (establishment of social protection funds). or sectoral coverage, the motivating This review starts by looking at recent, more assumptions, and the depth of analysis. In quantitative approaches to analyzing the effects order to conclusively determine the net impact, of SAPs. Evidence of the environmental Pandey and Wheeler show that an impacts of sectoral measures of the programs, encompassing, in-depth study is required. debt accumulation and trade liberalization is Given data scarcity and statistical limitations, then examined. The review concludes with a quantitative, high-caliber studies are presentation of country case studies and policy infrequent. analysis of World Bank SAPs. 2 Environment Department Papers 2 General Approaches 2.1. Approaches for Evaluating Effects of recent approaches that have been developed to SAPs on the Environment estimate the effects of SA on the environment. The scope of the reviewed studies is focused on Theory identifies several channels through research questions that directly address SAPs which SAPs can potentially affect the and excludes studies of particular reforms that environment. First, changes in input and output might be part of SA (such as devaluation, prices can affect resource use. Second, SAP foreign direct investment, and privatization). In reforms influence the structure and scale of section III, case studies are presented by sector. economic activity. This in turn can increase or decrease the level of environmentally harmful 2.1.1 Strategic Environmental Assessment economic activities. It may also lead to increased (SEA) specialization in certain activities. Third, income effects can affect the use of natural resources, The SEA is a systematic process for evaluating either positively or negatively. Where segments the environmental consequences of proposed of society are adversely affected by the SAP, policies, plans, or program initiatives. In this may lead to an increased reliance on and general, it has been applied in the sectors of degradation of natural resources. Lastly, SAPs energy, transport, and waste management but rarely in the context of policy and planning can affect environmental management by evaluation. Kessler and Van Dorp (1998) altering public finance and by impacting develop a methodology to assess the impact of institutions and governance. All these effects SAPs on natural resources and their basic are dependent on the initial conditions and the values for human society. It focuses on soil, environmental and social characteristics forest, and water resources. The analytical within the country. Table 1 summarizes the framework emphasizes the: above theoretical linkages. · Environmental quality of soil, water, and forests and the requirements for their Each SAP is a combination of several reforms sustainable use that combine through diverse channels to · Environmental regulation or stabilization affect the natural environment. The individual functions of these resources and the effect and relative significance of each reform- consequences of these impacts on human environment channel need to be evaluated and society (instead of solely short-term compared with the impacts from other productive assets) channels. Therefore, the net effect is ambiguous · Long-run consequences and thresholds of and needs to be addressed empirically. In the environmental degradation for different remainder of this section we present some human systems using these resources. Environmental Economics Series 3 A Critical Review of the Literature on Structural Adjustment and the Environment Table 1. Theoretical channels through which SAPs influence environmental conditions Example of potential impact Approaches used Theoretical channels on the environment to examine channel ( + ) Movement away from coal use to · Strategic Environmental cleaner fuel Assessment Removal of price distortions ( ­ ) Reduced use of fertilizers, affecting · Second-Best Theory soil degradation · Four-Dimensional Analysis ( + ) Movement away from · Strategic Environmental Change in structure and environmentally damaging activities Assessment scale of economic activity ( ­ ) Increased specialization in erosive crops ( + ) Poor movement away from · Social Dimension environmentally damaging activities to · Sectoral Models: Changes in income levels jobs in new sectors Agriculture and forestry and income distribution ( ­ ) SA creates deeper poverty for section certain segments of society, forcing them to marginal agriculture ( + ) Public sector moves away from · Social Dimension activities in which it is inefficient to · Sectoral Models: Public Change in environmental specialized activities such as protecting sector and governance management public commons section ( ­ ) Reduced public sector budget for protecting natural resources or enforcing regulations The analysis develops a model that Qualitatively, this paper incorporates the incorporates resources differentiated by type findings and developments of case studies. and use. Indicators on the state of the resource Difficulties with the model include: and trends are then included, and the impacts · A shortage of reliable quantitative data, of SAPs on these resources is then examined. especially long-term data, state indicators of The model combines both quantitative and environmental qualities, and data on issues qualitative methods. Quantitatively, the study related to regulation, diversity, and cultural compares the environmental indicator trends for functions of natural resources different types of water, soils, and forests with · The absence of regional statistics (national the social and economic indicators that were statistics can hide important regional directly influenced by SAP measures. For variation and are often inadequate for example, the implementation of SAP measures understanding specific dynamics) coincides with a decline in the use of fertilizers · Uncertainties with respect to the "SAP in low-external-input agriculture and an implementation gap" in the nine countries increasing consumer price index, indicating a reviewed possible relationship between SAP · The short period since major SAP measures implementation and future soil depletion. were implemented. 4 Environment Department Papers General Approaches The analysis yields some interesting results, countries, SAPs have had the opposite however: effect, stimulating urban emigration due to 1. In situations characterized by high-external- increased urban unemployment. The result input agriculture (HEIA) and in areas with is an increase in rural pressures, such as the high agricultural potential, SAPs have a encroachment of marginal lands. Cultural positive impact by reducing environmental and social ties, living standards, and the pollution. Here, the declining subsidies on relationship between rural and urban agrochemicals have led to reduced overuse incomes and social services, appear to be of fertilizers, pesticides, and machinery. underlying key factors. This reduction in subsidies has also 4. In some cases, SAPs have stimulated a stimulated the adoption of more short-run reduction in the number of environmentally sound practices such as livestock due to a reduction in their value integrated pest management (IPM) and via trade liberalization. This has reduced zero-tillage. SAP measures have further environmental pressures. However the reduced pollution in these areas through the opposite effect has been observed in high- dismantling of highly inefficient parastatals potential areas where land is easy to (for example, cocoa board in Cameroon). purchase and land-management regimes are However, in situations characterized by not put in place or respected (for example, low-external-input agriculture (LEIA) and Venezuela). in areas with low agricultural potential, 5. The accelerated expansion of croplands and identical SAP measures have resulted in the encroachment of marginal land already negative impacts by reducing already low caused by population pressures are levels of external inputs. This forces farmers exacerbated by SAPs. This has resulted in to increase their use of organic matter and environmental degradation of fragile to overexploit soil fertility (causing soil ecosystems, such as mountainous areas, mining and soil depletion) or expanding semiarid lands, coastal zones, and wetlands. croplands (causing deforestation). 6. Some SAPs have resulted in increased tree- 2. SAPs have stimulated the expansion of cash planting initiatives and improved local crops, which may in turn increase the forest management regulations through feasibility of external inputs and technology. increased prices for fuel wood and energy This can also lead to increased deforestation sources, mainly in urban centers. However, and excessive pesticide use. Land tenure, tree-planting initiatives focus on the agricultural extension, the diversity of the productive properties of trees, emphasizing agricultural system, and the value of forest the use of rapidly growing tree species in functions for local communities appear to monocultures while disregarding other be key underlying factors. forest services such as safeguarding 3. In some countries, SAPs have stimulated biodiversity and preventing soil erosion. rural emigration--through deteriorated 7. SAPs have accelerated the use of water agricultural input-output ratios and the resources by economic sectors--such as enhancement of opportunities in urban industries, mining, tourism, and areas--resulting in reduced rural pressures irrigation--through the creation of dams but increased urban pressures. In other and reservoirs. Environmental Economics Series 5 A Critical Review of the Literature on Structural Adjustment and the Environment The above results reinforce the point that the structure, shifting social relations, and SA planning process should include detecting evolving institutions. Two case studies, in the need for remedial or additional policies to Venezuela and El Salvador, highlight that the mitigate any adverse environmental effects or to effects of migration, poverty, nongovernmental realize the environmental benefits. The negative organizations, and social relations and effects described above do not prohibit the inequities should also be considered if a success of SA if the right controls are put in complete understanding of the environmental place. In each case, the understanding of impacts of SA is to be possible (see Appendix institutions and governance are critical to a C.2). Because social relations in adjusting successful SAP. societies change, such reforms can have negative long-term environmental impacts. In 2.1.2. Village-Economy-Wide Model Venezuela, urbanization intensified urban Village economies and peasant households environmental degradation, and in El represent the main link between the economy Salvador, watershed management deteriorated and the environment in sub-Saharan Africa, because of consolidated social and economic because the environment or natural resource relations that generated an environmental base is a key input in their production systems. crisis. Reed's study claims that these case Holden, Taylor, and Hampton (1999) present a studies raise questions about the viability of an typology of village economies and village- SA "win-win" strategy that encourages economy-wide models. The framework is policymakers to give priority to policy reforms applied to a specific case of a remote Zambian that increase economic efficiency while also village that is characterized by a missing or generating positive environmental changes. negligible labor market, input supply The case studies do highlight the importance of constraints, and credit rationing. The impacts of the social dimension to the success of a SAP, external shocks, including SAPs, on cash-crop but it is difficult to attribute the negative production and chitemene (shifting cultivation) environmental impacts to SA alone. The are then examined. The findings indicate that by analysis underlying the study's conclusions is decreasing the profitability of maize production, based on a before-and-after scenario and SAPs may encourage households to increase ignores the entanglement between new and old their chitemene production, resulting in more policies. In addition, the study was unable to rapid deforestation. The changes predicted by consider the true outcome of the SAP by the use of the model are close to responses considering the counterfactual (what would stated by farmers in a survey of 150 have occurred in the absence of the policy). households. 2.1.4. Second-Best Theory 2.1.3. Social Dimension Maler and Munasinghe (1996) develop a basic The following approach was developed by analytical framework to trace the Reed (1996b). It stresses the need to environmental impacts of macroeconomic understand the processes through which SAPs policies, particularly to identify where affect the environment. SAPs rarely affect the unforeseen negative environmental effects environment directly, but their effects are may occur, and to design remedial measures. transmitted through society via changing class Their model finds that it is the combination of 6 Environment Department Papers General Approaches macroeconomic policies and subsidiary export in Botswana), deterioration in trade, imperfections (policy, market, or institutional) reduction in the import tariff, a decline in the that leads to environmental degradation. The force of unskilled labor, and an increase in first-best remedy would be to eliminate these foreign earnings. The most dramatic impact on subsidiary imperfections without changing the environment was observed from a fall in macroeconomic policy. Maler and Munasinghe the price of diamonds, which led to a argue that imperfections may remain considerable increase in land pressure. This is unnoticed in a stagnant economy, but as explained by the fact that reduced income economic growth is induced by policy reforms, from diamond mining led to a fall in the environmental damage may rapidly worsen. If demand for manufactured goods. A fall in the constraints prevent or delay the correction of cost of capital increases the comparative imperfections, then a second-best situation will advantage from investment in the livestock arise. In such cases, modifying or fine-tuning sector, increasing land pressure. In two out of macroeconomic policy reform can be justified. five experiments, economic welfare (measured There is also a dynamic element in which as GDP) fell as land pressure increased. In the macroeconomic reforms could be intensified other three experiments, the reverse was seen: over time as the subsidiary imperfections are GDP increased with an increase in gradually eliminated. The authors summarize environmental well-being as land pressure three case studies to illustrate how declined. This supports the opinion that there macroeconomic policies might combine with is not a straightforward relationship between local imperfections to harm the environment. the growth in GDP and the state of the environment. Unemo (1996) presents a case study in Botswana that focuses on land pressures from While results from CGE models are criticized livestock farming. In Botswana land pressure is because of uncertainties surrounding the data most serious in the livestock sector, where and theoretical understanding, Unemo's study overgrazing is common. Several direct and illustrates that CGE can be used to highlight the indirect incentives for livestock to overgraze impacts resulting from SA. CGE modeling can stem from government policy. For example, the be used to identify the impacts on the government provided various forms of financial environment, and where environmentally assistance such as subsidized inputs and fiscal damaging policies cannot be avoided, incentives to the livestock sector. This additional measures could be designed to offset encouraged livestock holdings and thus these negative impacts. increased overgrazing. Other policies, such as those on trade and labor, also exacerbated this Another case study, by Lopez (1993), focuses problem. Using a computable general on Ghana and concludes that in general, price equilibrium (CGE) model, Unemo analyzed and wage-policy reforms that do not include impacts on the environment resulting from changes in land-management practices have macroeconomic policies. Five policy changes very limited impact on national income once the were monitored, and their resulting existence of land-quality effects is considered. environmental impacts include a fall in the price Goldin and Roland-Host (1994) present a case of diamonds (which is the most significant study in Morocco that establishes that trade Environmental Economics Series 7 A Critical Review of the Literature on Structural Adjustment and the Environment liberalization, combined with reformed water 2.1.6 Accounting for Chaotic Effects prices, induces substantial reductions in Mearns (1991) does not propose a specific agricultural water use and an increase in GDP. framework for analysis but challenges the The evidence from these studies leads Maler standard model of SA-environment linkages and Munasinghe (1996) to conclude that the first-best remedy is to eliminate the subsidiary on five major counts. The first challenges "the imperfections such as policy and market pretensions" that neoclassical economics is a failures, without changing macroeconomic predictive science. Three further challenges policies. This conclusion should be treated with refer to the omission or relegation of the caution because the case studies focus on only following concepts relevant to a full a couple of market imperfections, whereas a understanding of economic system- real economy produces many obstacles to the environment interactions: historicism success of the SAP with respect to the (irreversible time and evolutionary change), environment. For instance, the infeasibility of scale limits, and, finally, access to or dealing with social and environmental distribution of resources. The fifth challenge repercussions of SA in subsequent programs is concerns the inadequate way that discussed in Reed (1996) (see Appendix C for a environmental change is conceptualized case study for Cameroon). within the model (with respect to uncertainty, chaos, and nonlinearity), which allows random 2.1.5 Four-Dimensional Analysis incidental effects to produce significant Cromwell and Winpenny (1993) propose a environmental changes. simple structured approach to analyzing the environmental effects of economic reform The author concludes that SA-environment focusing on four dimensions: spatial coverage, linkages require multiple and comprehensive scale of production, product mix, and analyses accompanied by extensive discussion production techniques. The method allows between experts and the individuals affected. extensive analysis that incorporates data, Without detailed information on constraints anecdotal evidence, and structural limitations within a particular livelihood system, to provide an overall picture. The study explanatory models are unable to anticipate concludes that economic reforms appear to the likely environmental consequences of have had an initial negative impact on the policy reforms. environment in Malawi, particularly on the crop mix and intensity of production. This is Logic and reference to noneconomist studies attributed to the already relatively fragile support the argument. An example from environmental base and underlying structural factors, such as the inability to change the Malawi highlights the point that a female production technique. The study criticizes the small-holder, who has the majority of income "insensitivity of adjustment loan prescriptions originating from nonfarm activities, will not to local conditions." The authors qualify their invest effort into soil conservation if fertilizer conclusions as tentative due to unreliable data essential for self-provisioning food is too in some areas and the absence of data in other expensive. "Only by acknowledging the multi- areas, primarily for certain economic indicators faceted problem can a possible solution such as such as migration patterns and changes in providing environmentally benign off-farm agricultural price and input-output ratios. employment be achieved" (Mearns 1991). 8 Environment Department Papers General Approaches 2.1.7 Computable General Equilibrium (CGE) economic model. Social changes, such as Models migration, have also been studied by CGE. For example, Glomsrød, Monge, and Vennemo CGE models are a system of equations (1999) study its effects on deforestation. A good describing the economic relations in a example of modeling uncertainty is available in macroeconomy. These models assume Abler, Rodriquez, and Shortle (1999). In a case underlying values for the parameters in the study for Pakistan, Reed (1996) addresses some equations, and macroeconomic policy shocks of the shortcomings of CGE, such as its inability are then incorporated. The models simulate how to model dynamic and distributional these shocks affect different aspects of the implications (see Appendix C). The model uses economy. a tax-policy simulation and a long-run growth model to incorporate dynamic issues, and the In this paper we review several studies that use distributional effect is reflected in an CGE to analyze the effects of SAP reforms. CGE environmental Kuznetz curve (World Bank, has been used to model the introduction of 1992). Overall however, the CGE methodology property rights (Persson and Munasinghe 1996; is limited because of time constraints, and it is Munasinghe and Cruz 1994) and the only applicable to countries that have the right modification of the functioning of markets kind of data available. CGE is highly data- and (Persson and Munasinghe 1996). Environmental parameter-dependent, and attention should be outcomes after the SA reform can be monitored paid to appropriate sensitivity analysis to by using several environmental indicators, account for the uncertainty of the underlying such as those found in Abler, Rodriguez, and model parameters. Shortle (1999). In Wiig et al. (2001), resulting environmental impacts are fed back into the Environmental Economics Series 9 3 Sectoral Analyses The following section reviews the evidence in the reform process include the movement from the literature of the impacts of SA on the maize production toward high-value dairy environment by sector. Annex 1 presents a farming and horticultural crops (particularly in summary table of these theoretical linkages, land-scarce areas). their effects on the environment, and the studies that analyze them. Although the sectoral The environmental impact of these changes is approach is a useful one for thinking about mixed. Greater regional specialization in maize potential impacts, partial evaluations may be production is likely to be environmentally misleading. For example, Pandey and Wheeler benign but will also increase the vulnerability of (2001) show that SA has had strong impacts on small farmers unless there is a significant individual sectors, but the overall impact is improvement in maize marketing. Movements neutral. This stresses the need for in-depth, toward dairy farming and horticultural crops wide-reaching studies. were found to have had mixed environmental impacts depending on the underlying 3.1 Agriculture technology and farm-management practices. This section summarizes key findings in the The reform program failed to intensify literature for the agricultural sector. The agriculture as originally planned. Constraints environmental impacts are primarily a result of created on the use of chemical fertilizers and credit have encouraged manure use and substitution effects in crop production, the composting. In some areas, sustainable changing pressure on land due to the income increases in crop yields have been achieved by effects of the reforms, the restructuring of land- improved land and water management, rather tenure rights, and credit availability. than through the adoption of "improved 3.1.1 Substitution Effects inputs." For example, in Machakos District, investment in soil and water conservation was Agricultural-policy reforms within SAPs usually considerable, particularly in areas given over to encourage a shift from the production of high-value crops where tenure rights are secure. subsistence crops toward cash crops. Richardson The area also benefited from considerable (1996) reports evidence of changes in the types research, training, and extension and long-term of crops cultivated under the SA period in donor assistance in soil and water conservation. Kenya. According to Richardson, it is difficult to Richardson stresses that more information is attribute these changes solely to the economic needed for a plausible prediction of the supply reforms. For example, switching effects that are of and environmental response to changing consistent with the direction promoted under economic incentives at the macro level. Environmental Economics Series 11 A Critical Review of the Literature on Structural Adjustment and the Environment 3.1.2 Income Effects states that where there is a difference in gender access, control of land, and livestock and System-wide reforms under SA affect the decisionmaking within the household, women rewards to factors in different sectors and frequently contribute to the production of activities in the economy. Cuts in government commodities either without a wage or with an expenditures and changes in its overall inadequate wage and to husbands who composition must also affect secondary incomes appropriate the proceeds of their labor. In such (for example, transfers) and entitlements. These a situation, maximizing short-term economic and any other effects virtually guarantee that gain through unsustainable mining of the income and income distribution are affected by resource base may outweigh the long-term SA (Ferreira and Keely 2000). consequences of this unsustainable mining. There are many examples of this "reproduction Postigo (1996) argues that countries that have squeeze," which emphasizes that SAP undergone SA have experienced economic instruments (usually subsidies and prices) do stagnation accompanied by increased suffering not reach the women who have the on the part of the poorest of the population and responsibility for working in the field alleges that this is the result of efforts to service (Mackenzie 1993). external debts. Assuming that poverty and environmental degradation are linked, Postigo Some authors go further than that and question continues, it can be concluded that where SAPs not whether SAPs improved income, but have resulted in increased poverty, they have a whether higher incomes necessarily bring about negative impact on the environment. The paper more sound agricultural practices. For example, notes, however, that previous government Mukherjee (1995) argues that cultivators in policies equally failed to solve the problem of developing countries, such as India, do not poverty, and that the actual impact of SAPs on modify their land-management practices and the environment does not alter this situation. systems easily because society (particularly in the rural sector) is to a large extent influenced A similar point regarding income effects of by customs, traditions, usage, and conventions. SAPs is made by Mackenzie (1993). The author A change in the farming system and in the farm- stresses that the group responsible for the management practices cannot come about in management of the natural resource base in response to increases in the producer's price agriculture experiences a negative income effect margin. In addition, cultivators with very as a result of the SAP but is not targeted by the profitable crops that are extremely erosive will SAP instruments. Evidence links increased not implement conservation measures unless stress on women farmers, who have significant their returns are perceived to be affected by soil responsibility for the day to day management of erosion almost immediately. the land, with a tendency toward unsustainable exploitation of the resource base. The study 3.1.3 Land Prices and Tenure suggests that the implementation of SA policies The positive effects of the establishment of frequently increases the emerging contradiction tenure rights have been well studied and between land-use management for agricultural confirmed in the literature. Land-reform production to ensure survival and the long-term programs, which provide secure tenure to sustainability of the resource base. Mackenzie farmers, can have indirect benefits for the 12 Environment Department Papers Sectoral Analyses environment. Where private landownership is price of unskilled labor resulting from the clearly established, farmers are more likely to discontinued production in the forest sector. grow perennial crops and adopt intensive agro- forestry methods instead of traditional annual The authors note several data and model crops and extensive cultivation practices limitations. Because of various data (Southgate 1988; Southgate and Pearce 1988). adjustments, the results of the simulations are Young and Bishop (1995) argue that this in turn mainly indicative and not necessarily precise, favors soil-conservation efforts since perennial quantitative measures. Second, because the crops tend to be less erosive. A shift to model they develop is essentially static, the perennials can also reduce demand for chemical results are comparative snapshots of different fertilizers, with potential health benefits policy experiments. Third, the approach does (although the same is not necessarily true of not include all possible linkages with pesticide use, because many tree crops require deforestation. Migration and population growth heavy application of pesticides). A more recent are two causal factors that may be important and quantitative paper by Persson and but are not investigated. Furthermore, the Munasinghe (1996) analyzes the importance of model neither allows for reforestation nor tenure to deforestation and soil erosion in Costa includes erosion and other external effects of Rica. The authors use a CGE model that differs deforestation. from the standard approach of CGE modeling because it includes undefined property rights Similarly, Lopez (1993) states that the common- and it modifies the markets for logs and cleared property regimes may traditionally have been land. sufficient to ensure sustainable use of agricultural lands through the management of Persson and Munasinghe develop three population and through fallow periods, which scenarios. They take the current situation of increase the ability of land to regain its fertility. undefined property rights as the base case. In These traditional arrangements have been the second case, property rights are defined and overwhelmed ultimately by economy-wide the opportunity value of forests is set 28 percent forces. The policy simulations in Lopez's paper higher than the value derived from show that the primary force of changes in deforestation. The definition of property rights "supply response in agriculture, is that of results in a dramatic decrease in deforestation expansion of land already cultivated rather than and an increase in the net import of logs. that of agricultural intensification. This result Sensitivity analysis shows that even a relatively suggests that, in general, macro price and wage small opportunity value of forests decreases policy reforms that do not incorporate changes deforestation dramatically. Varying the interest in land management practices have very limited rate while keeping the opportunity value fixed impact on national income where land quality shows that high interest rates promote effects have been considered" (Maler and deforestation and vice versa. In the third Munasinghe 1996, p. 118). scenario, the effects of taxes on logs, land, unskilled labor, and capital are investigated. 3.1.4 Agricultural Credit Resources shift to the agricultural sector, which The aim of financial market reforms is often to increases deforestation. The increase in increase the availability of credit to poorer, deforestation can be explained by the lower Environmental Economics Series 13 A Critical Review of the Literature on Structural Adjustment and the Environment small-scale farmers. One argument put forward land (Foy and Daly 1989). The credits and by Mink (1992) is that credit facilities can subsidized loans intended to support stimulate a shift toward perennial crops, which environmentally beneficial activities had the often results in less soil erosion but which small opposite effect. farmers traditionally avoid because of the crops' long maturation periods. More generally, 3.1.5 Full Effects of Structural Adjustment improved access to credit will lead to increased Wiig et al. (2001) use a computable general investment in farm improvements, greater use equilibrium (CGE) model to simulate the effects of modern inputs, and higher levels of of typical SA policies on the Tanzanian economy productivity. and environment. By incorporating a model of the nitrogen cycle into a CGE model, they Mink also points out, on the other hand, that establish a two-way link between the increased availability of credit may encourage environment and the economy. For example, a the expansion of cultivated areas, which allows policy change such as a reduction in fertilizer for intensification through more use of subsidies will lead to a reduction in soil machinery and industrialized inputs such as nitrogen (economy on ecology), which is the agrochemicals. These allow farmers to recover source of reduced production in the following more easily from declining natural soil fertility, years (ecology on economy). reducing incentives for soil conservation in the short term and contributing to the eventual A "business-as-usual" baseline scenario is used. exhaustion of land in the long run. A notorious The policy changes of the SAP are then case of environmental destruction linked to the introduced stepwise, one on top of the other, availability of agricultural credit is the until the full package is reached. The policies expansion of cattle ranching in Brazil during the considered were the removal of subsidies, 1980s. Subsidized credit for large-scale ranching reduction in the export tax rate, devaluation, is identified by several authors as one of the reduction in government expenditure, and cuts most significant causes of deforestation in the in foreign transfers. The model considers three Amazon during that period. important environmental variables: natural soil productivity, soil depth, and use of land. Opschoor and Jongma (1996) state that the removal of credit facilities and subsidized The change in natural soil productivity differed interest rates may affect environmental quality between crops. The change compared with the if it leads to changes in the sectoral composition baseline scenario was small or zero for all crops that are not environmentally neutral. However, with the exception of coffee, cotton, and maize, monetary and interest reforms may also which changed by 0.5 percent, ­0.1 percent, and contribute negatively to environmental quality ­0.6 percent, respectively. The removal of when credits and subsidies benefit subsidies had a negative impact on soil environmentally damaging activities. An productivity in all cases. In the case of coffee, example of the latter can be found in Costa Rica, this was offset by the reduction in the implicit where relatively cheap loans have made it export tax on cash crops and currency possible for large areas of land to be used for devaluation. These policies resulted in the full large-scale cattle farming on largely unsuitable SAP having a positive effect on soil productivity 14 Environment Department Papers Sectoral Analyses for coffee. Currency devaluation had a negative problem. A species index for Ghana was also effect for cotton and maize. estimated using a species-forest area relation. Soil depth was even less sensitive to the The authors demonstrate that cocoa and maize different policy scenarios. The removal of policies undertaken under the SAP since 1983 subsidies causes a 0.5 percent reduction in soil have reduced the impacts of cocoa land depth for tobacco compared with the baseline expansion and, to a lesser extent, timber scenario. There was no change for any other extraction on forest loss. Although little impact policy or crop. was found on the timber and harvesting trends, the relative returns to timber production have The third environmental impact that the model an important impact on the rate of deforestation considered was land use. Again, it was the and biodiversity loss in Ghana. More removal of subsidies on fertilizers that was specifically, higher agricultural and timber significant. The total use of land increased by prices, even where subsidies on inputs are 3.5 percent when subsidies were removed. removed, may have helped reduce demand for forested land and thus have aided biodiversity 3.2. Forestry conservation. The effects on deforestation trends have been analyzed primarily through the interaction with Glomsrød, Monge, and Vennemo (1999) agricultural land expansion. Studies have also examine the migration decision of Nicaraguan looked at the impacts of changes in agricultural squatters at the frontier between agricultural and timber prices, public sector reform, and land and forest reserves (See Munasinghe and devaluation. Perhaps one of the most interesting Cruz, 1994 for a description of a case study in results is by Pandey and Wheeler (2001), who Pakistan which examines migration and find that each 10 percent devaluation in deforestation). The study uses a CGE model to currency induces a 2 percent increase in round- analyze the impacts of several policy options on wood production. economic growth and forest conservation. The authors investigate the impact of the SAP on Barbier and Beghin (2000) investigate the deforestation taking place where the impact of SAPs introduced in Ghana in 1983 on agricultural frontier has advanced into forest forests and biodiversity, directly through the reserves in Nicaragua. The opportunity cost of proximate causes of agricultural land expansion migrating to the frontier does not simply and timber production and indirectly through depend on wage-income opportunity, but also output and input prices for cocoa, maize, and on the market price of basic grain, which timber. A piecewise, linear estimation determines the capacity to consume beyond procedure, which separated the influences of subsistence given a certain real wage. The the preadjustment and postadjustment periods, authors find that reducing public expenditures was used to estimate a recursive model. The both conserves forests and enhances economic model included variables such as forest loss, growth in the long run while showing positive cocoa land, maize land, and timber-production distributional effects. An increase in the sales equations as a function of input and output tax reduces economic growth, but as rural prices developed from an optimal control incomes decline and people migrate to urban Environmental Economics Series 15 A Critical Review of the Literature on Structural Adjustment and the Environment areas, deforestation declines. Under an deforestation within the development aid increased flexible-wage regime, rapid economic community. A main policy recommendation growth does not ensure less pressure on forest according to this approach is population control reserves. The reason for this is that despite the and agricultural intensification; increased considerably higher rate of growth of the productivity will reduce the deforestation economy, the rural wage level increases pressure. The market approach, on the other insignificantly and the higher food prices cancel hand, emphasizes the importance of alternative out the potential benefit from improved and less employment. It also highlights the uncertain income opportunities within the counterproductive effect on deforestation of market economy. Subsistence farming is intensification programs that increase the increasingly attractive under the new price profitability of agriculture close to forests. The regime, which means that its impact on major result of Angelsen, Shitindi, and deforestation is still negative after 10 years. The Aarrestad's regression analysis is that producer authors conclude that under different policy prices, in particular of annual crops, are scenarios, rapid economic growth does not important factors in encouraging the expansion ensure forest conservation. Noticeably, there are of agriculture. A more complex Chayanovian policies that initially intensify deforestation but model with subsistence requirements and encourage forest conservation in the long run, imperfect labor and credit markets would such as reducing public expenditures. provide a more realistic description of farm households' behavior and the constraints that Angelsen, Shitindi, and Aarrestad (1999) they face. A significant conclusion from this empirically analyze the linkages between input study is that increases in productivity and/or and output prices, the connection between output prices in Tanzanian agriculture will income and changes in resource use, and the effects of technological change on deforestation likely lead to more forested areas being rates in Tanzania. They find that increases in converted to agricultural land. Recent economic agricultural productivity and output prices liberalization has increased agricultural-output increased the conversion of forested areas to prices, to which Tanzanian farmers have agricultural lands. To clarify the cause of responded by increasing agricultural area and deforestation, they consider two different production. The authors warn that results of the models of agricultural land expansion: the study should be interpreted with great caution subsistence (population) approach and the due to data-quality issues. market (open-economy or profit-maximizing) approach. The approaches make different Pandey and Wheeler (2001) combine a complete assumptions about household behavior and the record of World Bank SA operations with a 38- labor market, the latter being more most year socioeconomic database for 112 developing important. In the subsistence approach no labor countries to analyze the impact of SA on market exists, whereas a perfect labor market is deforestation. Using round wood as a proxy for assumed in the market approach. deforestation, they develop an econometric model of trade, production, and consumption of The subsistence approach seems to dominate wood products. The model looks at five sectors the thinking on the causes of, and remedies for, of wood products (round wood, sawn wood, 16 Environment Department Papers Sectoral Analyses panels, pulp, and paper), all of which are on overseas deforestation depends on relative significantly, but differently, affected by SA. volumes of activity in the five sectors. The authors find that SA has not promoted 3.3 Water Sector domestic deforestation because the impacts The potential impacts of SAPs include changes balance each other out: wood-processing in the level of water use and water pollution. activity falls, round-wood exports decline, and There appear to be few studies on the impacts round-wood imports increase. While the overall of SAPs on water pollution. This may largely be round-wood production remained nearly because the data that can provide direct insights constant, the results suggest that SA induced into the impact of SA on water pollution are powerful and durable changes within the forest sparse. Most water pollution is highly localized sector. Sectoral activity shifts away from and is often linked to discharges of human industrial inputs toward the production and waste rather than to industrial or other consumption of fuel wood. It is unclear whether economic activities. The pattern of change is this was accompanied by an increase in health complex and often hard to interpret. damages from indoor air pollution. Arrangements for municipal financing and infrastructure--which affect investments in, and The results suggest that income growth has the operation of, sewerage and wastewater- reduced the pressure on forests, while treatment works--are at least as important as population growth and urbanization have economic restructuring. increased it. For insights into the impact of macroeconomic policies, the authors estimated round-wood-production equations that Hughes and Lovei (1999) consider the impact of incorporate the monetary, fiscal, and trade- economic reform (general reforms, not only policy variables. They find the only policy that under SA) in the countries of Central and has a significant impact on deforestation is Eastern Europe (CEE) and the newly devaluation. Each 10 percent devaluation industrialized states (NIS). They compare two induces a 2 percent increase in round-wood groups of countries: those that underwent fast production. Because major devaluations are not reform (mostly the CEE countries) and the uncommon, the implied impact of devaluation slower reformers. For water pollution, due to could be quite large. The analysis of macro- the lack of direct evidence, indirect indicators policy variables also finds that terms of trade were used. They report that the use of fertilizers have a significant effect on forest resource use. and pesticides fell by much more than crop production in both groups of countries. This Although Pandey and Wheeler find that the should have reduced runoff. While this may not impact of SA on domestic deforestation is translate into immediate improvements in water neutral, the study shows a displacement of quality, people who rely on shallow domestic deforestation to other countries, which groundwater sources for their drinking water may be a policy concern. The displacement should benefit from these changes. Similarly, the impact of SA is mildly negative for three of the decline in the number of livestock should have wood-processing sectors (sawn wood, panels, reduced the runoff of nutrients, which are and pulp) but large and positive for paper and important sources of water pollution in the even larger for round wood. The overall impact Baltic countries in particular. Environmental Economics Series 17 A Critical Review of the Literature on Structural Adjustment and the Environment The decline in water use in the industrial sector resource effectively was seriously eroded by the was 5 percent per year less than the decline in pattern of public-expenditure cutbacks. The industrial production while in the fast- sector has now been targeted for institutional reforming countries, it was about 5 percent and management reforms, and substantial greater. Effluent changes in the slow-reforming investments are being made in physical and countries have decreased at about the same rate human capital. The paper notes that the as industrial production has. This fact reinforces emerging short-term evidence suggests that the conclusion that economic reform had little there has been substantial improvement in or no effect on the overall environmental wildlife management. performance. However, due to the multiplicity of problems associated with economic reform, Munasinghe and Cruz's (1994) study of stronger conclusions cannot be formed. Zimbabwe finds that wildlife-based activities (unlike cattle ranching which competes for The impacts on water use by the specific SAL limited land resources) are better suited to the instruments of trade liberalization and efficient countries semi-arid climate and poor soils (for pricing of water have been studied for Morocco more details see Annex 3). The wildlife-based by Munasinghe and Cruz (1994) (see Annex 3) activities replace cattle ranching under the new and by Goldin and Roland-Host (1994). Both policies of openness. Considering the carrying analyses show that the level of water use capacity of the arid soil and the vested interest declines and point to the positive effect of people have in preserving the environment for removing both price and policy distortions. wildlife-based activities, the authors conclude 3.4 Wildlife-based Sector that a shift to the wildlife sector actually helps improve the ecological balance in the country. SAPs affect the wildlife-based sector (for The study does not, however, discuss the example, wildlife tourism) through public sector possible negative effects of further expansion of reform, exchange-rate adjustments, and the wildlife-based sector, such as large-scale institutional reforms. These impacts tend to be tourism practices. indirect. 3.5 Energy A study in Kenya finds that the wildlife sector Environmental impacts are affected not just by has been indirectly affected through the impacts on total energy use, but also by changes exchange-rate and public-expenditure cutbacks (Richardson 1996). The author analyzes reforms in the composition of energy use. These can be supported by the World Bank that were not positive or negative. For example, the included in the SAL/SECAL program of the introduction of electricity tariffs can increase Bank but are regarded as "adjustment type" energy efficiency but may also induce an support because of their conditional nature and increase in the use of traditional fuels, which emphasis on the generation of foreign exchange increase air pollution. Price reforms and and the need for institutional and pricing privatization were the two policies that have reforms. Over the period 1980­1989, the been considered in the literature. exchange-rate reforms increased the demand for wildlife services, but at the same time, the Meier, Munasinghe, and Siyambalapitiya (1996) capacity of the sector to manage the wildlife consider two aspects of energy policy and 18 Environment Department Papers Sectoral Analyses environment linkages: the environmental slower reformers of the former Soviet Union. consequences of an energy sector pricing reform Price adjustments and convenience both suggest and the effect of an environmental constraint on that the share of coal in final consumption is sectoral policy. Using the example of electricity- likely to continue to fall. Another aspect of pricing reform and the commitment to reduce energy transition is that the use of petroleum greenhouse gas (GHG) emissions in Sri Lanka. products for transport fell by significantly less than GDP in both groups of countries. There To examine the impacts of alternative was a strong growth in vehicle fleets. In faster- electricity-pricing policies, the authors design reform countries, many of the new passenger three pricing scenarios, including a "business as cars have been more modern vehicles with usual"one. The model finds robust results, lower emission levels. indicating that setting electricity prices to reflect the long-run marginal cost (LRMC) has an From an environmental health perspective, the unambiguously beneficial impact on the most damaging pollutants are those from small environment, both in the country and globally. sources, such as coal stoves and boilers. This holds for a range of uncertainties explored Adjustment reforms can have both positive and in the sensitivity analysis. negative effects on health. Lampietti et al. (2001) assess the impacts of the introduction of an The authors conclude that the emphasis given to electricity tariff as part of an economic-reform efficiency pricing in both project loans and SA program in Armenia. For sampled households, lending is justified not only on grounds of electricity-consumption records dropped, on economic efficiency, but also on grounds of average, 17 percent, and reported consumption minimizing the environmental damage of of substitutes, such as wood and gas, increased. economic development. This may be particularly apparent among poorer sectors of the society. While the Munasinghe and Cruz (1994) (see Annex 3) inefficient practice of heating with electricity study Poland and Sri Lanka and conclude that was reduced, potential environmental problems to control emissions, additional environmental associated with wood consumption, such as regulations are necessary beyond efficiency- deforestation and indoor air pollution, improving price reforms. increased. Hughes and Lovei (1999) provide an example of a positive impact of SA reforms. Environmental impacts are affected not just by Using indirect measures, they find a strong total energy use, but also by the composition of downward trend in the use of coal by small energy use. From an environmental perspective, sources (such as stoves and boilers) for both a shift from coal to gas is beneficial because of fast-reforming and slow-reforming transitional the resulting reductions in emissions of air countries. The relationship between the prices of pollutants. Fuel switching has the highest coal and substitute fuels, especially gas, in impact on ambient air quality compared of any Eastern Europe is found to be more favorable to pollution source. Hughes and Lovei (1999) find coal than it would be if these prices fully that the consumption of solid fuel in transitional reflected world prices. As these pricing economies fell by more than the total energy distortions are gradually corrected during consumption did, but this fall was largest in the reform efforts such as SAPs, it is likely that the Environmental Economics Series 19 A Critical Review of the Literature on Structural Adjustment and the Environment share of coal (a dirtier fuel) will continue to inequality, brain drain, and a general decline in decline as its price reflects the world market living standards. A decrease in employment in price and increases. the formal sector encourages people to move into the informal sector, which is beyond the 3.6 Urban Environment scope of government policies (particularly The main concerns for the effects of SAP on the taxation and regulation). Riddell concludes that urban environment are the possibility that the in general, SAPs impoverished human life in advocated reduction in public expenditure will African cities by increasing the cost of living, cause insufficient urban services (such as water reducing wages, reducing social services and purification and waste hauling), increased housing, and decreasing employment facilities. urban pollution, and the uncontrolled flood of migrants from the rural areas. Riddell (1997) Onursal and Gautam (1997) look at the effects of argues that countries have suffered from SAP-related liberalization and air pollution in reduced formal employment, declines in Mexico. They say that due to the trade services, reduced education facilities, mounting liberalization, the number of new imported cars Box 2 The Energy Sector in Transitional Economies Hughes and Lovei (1999) consider the impact of economic reform in the countries of Central and Eastern Europe (CEE) and the newly industrialized states (NIS). They compare two groups of countries: those that underwent fast (or advanced) reform (mostly the CEE countries) and the slower reformers. It was hoped that economic reform and restructuring associated with transition would eliminate the perverse incentives that underlie many of the environmental problems in the centrally planned economies. They consider the impact of economic reforms on total energy use and its composition. They find that most advanced reformers reduced their energy intensity as they managed to put in place the institutional founda- tions for a lasting transformation. Through the rapid adjustment of energy prices to reflect costs, the enforce- ment of the payment discipline, and large-scale privatization of industrial firms, the energy intensity of the economy declined. By contrast, most slower reformers have hesitated to embark on reforms or have failed to follow through on initial commitments. As a result, in the slower-reforming countries, energy consumption remained nearly as "excessive" in 1995 as it was at the beginning of transition (see Chart 1). Chart 1. Excess energy consumption Excess energy consumption by country group (1990 and 1995) 90 80 70 Percentage60 50 40 1990 1995 Advanced reformers Slower reformers Source: Hughes and Lovei 1999. 20 Environment Department Papers Sectoral Analyses has increased considerably. It is unclear whether construction or settlement projects in frontier this has had a detrimental effect on air-pollution areas. Evidence from the Brazilian Amazon levels. While an increase in the number of cars supports the notion that public spending on would increase pollution, replacing the vehicle transport and other infrastructure is closely fleet with newer, more efficient vehicles would linked to the settlement of frontier regions and offset this increase. As most air-pollution time thus the rate of deforestation and land series start in the 1990s, it is difficult to assess degradation (Binswanger 1989; Mahar 1988; conclusively the effect of SAPs. Some data, in Reis and Guzmán 1992). Conversely, it may be fact, show slightly declining (or constant) argued that continued lack of public pollution. Data quality is simply insufficient to infrastructure and access to external inputs and draw broader conclusions. markets obliges producers to maintain unproductive and environmentally destructive SALs, as argued in the El Salvador country practices, such as slash-and-burn cultivation of study by Reed (1996) (see Annex 3), have biased annual food crops. Ozório de Almeida and the economy to grow in areas such as Campari (1993) examine this hypothesis in a commerce, industry, and services in general, study of the link between agricultural which are highly concentrated in metropolitan expansion and deforestation in the Brazilian areas and their surroundings. Development Amazon. activity in metropolitan areas, as well as migration from rural areas, has seriously With respect to public sector expenditures and affected the urban environment in several ways. revenues, Richardson (1996) concludes that in It has led to increased volumes of untreated the environment-related sectors in Kenya, no domestic and urban waste. In addition, efficiency gains have been achieved. Over the deforestation has increased due to growth in SA period, the decline in real expenditures, the housing projects and fuel-wood harvesting. Air erosion of civil service salaries, and the increase contamination and lack of potable water are the in corruption and theft have had a detrimental most acute problems. impact on the effectiveness of the public services, including the environment-related 3.7 Public Sector Reform sectors. Although development expenditures have tended to keep pace with inflation, there Environmental protection is the responsibility of has been a disturbing trend in the relationship governments in most countries. Cutbacks in between external funding and the government public spending under SA can adversely affect contribution to development projects. Over the the level and quality of services, such as waste SA period, there has been a pronounced growth management and sanitation, and of the in the dependence on external sources for regulation and enforcement of pollution funding environment-related development standards, protected areas, etc. Environmental projects. Development priorities have been quality may therefore decline even when the determined more by the availability of finance economy is growing. from donors than by the economic, social, and environmental viability of projects. On the other hand, lack of funds may reduce public investment in projects with adverse Postigo (1996) also argues that institutional environmental impacts, such as road and dam policies that decrease public expenditure Environmental Economics Series 21 A Critical Review of the Literature on Structural Adjustment and the Environment usually lead to a significant weakening of the development and, second, the ability of SALs to state. Budget cuts may reduce the capability of bringing about changes in environmental the state to enforce controls and regulations that governance. are important instruments of environmental policy. Reed (1996a) confirms this point (see A few studies support the idea that case study for Jamaica in Annex 3). It is certain strengthening institutions is a prerequisite for that in some instances, the state has an bringing about economic and environmental important role to play in the protection of benefits. For instance, a case study by Lopez environmental resources. However, through (1993) focuses on Ghana and concludes that in public sector reform, the state may redefine its general, price- and wage-policy reforms that do role, allowing it to better perform its core not include changes in land tenure have very functions. This idea is analyzed in the limited impact on national income, once the Governance subsection below. existence of land-quality effects is considered. Similarly Munasinghe and Cruz (1994) show the 3.8 Governance importance of property rights for the Costa The World Bank has placed increasing emphasis Rican forestry sector by using a CGE model (see in SALs for improving the transparency, Appendix 3). These studies highlight the accountability, and effectiveness in borrowers' importance of environmental institutions in environmental governance. Examples of this are internalizing environmental externalities into explicit environmental policy prescriptions the economic structure, thus improving (such as the creation and strengthening of environmental efficiency. environmental institutions), adoption of policies In Seymour and Dubash (2000), the intentional for environmental protection, natural resources use of SA as an instrument to bring about management plans, investment in pollution changes in forest policy is analyzed. The study abatement, environmental impact assessments, concentrates on a few countries: Papua New or environmental taxation, standards, and Guinea, Cameroon, Indonesia, and Kenya. The regulations (World Bank 2001). In the late 1990s, authors examine the empirical record of the an average 21 percent of SALs with World Bank's attempts to apply SA to forest- environmental conditionalities addressed policy reform and ask to what extent the Bank reforms in the environment governance sector can be an effective proponent of forest-policy (World Bank 2001). Improved environmental reform through SALs. management, regulation, and enforcement are expected to have a greater role in improving They find that under the right conditions, the environmental performance and mitigating the World Bank has been able to catalyze key forest- impacts of growth than do changes in the policy changes in the context of SA lending (in structure of the economy and price incentives. Papua New Guinea and Indonesia). There have Due to the difficulty of empirically studying also been failures and omissions. In Indonesia such influences, the effects of governance and Cameroon, government commitments have strengthening on environmental performance not been transformed into meaningful changes are not well covered in the literature. The in concession allocation and management questions analyzed in the SA literature discuss, systems. These case studies highlight the first, the importance of institutional importance of the conditions under which the 22 Environment Department Papers Sectoral Analyses Box 3 Good Practice of Institutional Development in World Bank Loans The following two recent loans stand out as good examples of mainstreaming environmental governance in SA. Environmental concerns are mainstreamed in these loans, with clear linkages made between development outcomes and the management of the environment and natural resources. The Madagascar Structural Adjustment Credit II (April 1999) features (1) a description of the natural endow- ment as a source of wealth in the Country Context section; (2) policy reforms in land tenure in order to permit tourism developments; (3) reforms in the mining sector, including a new mining code with transparent grant- ing of concessions and the application of environmental standards; (4) conditions on petroleum-sector privatization to deal with environmental cleanup; and (5) reforms in the fishery sector, including the auction of quotas. This wide range of environmental interventions is integral to the wider reform program. The Bulgaria Environment and Privatization Support Adjustment Loan (January 2000) presents a comprehen- sive program for dealing with environmental liability as a companion to the Financial and Enterprise Sector Adjustment Loan II. The loan (1) prescribes amendments to the Privatization Law to clarify the liability of the state for environmental damages resulting from past actions; (2) establishes Environmental Impact Assess- ment requirements and risk assessment methodologies for privatization; and (3) requires remediation plans and execution agreements as part of the privatization process. Privatized establishments become subject to Bulgarian regulations for environmental management. This loan effectively sets the standard for other coun- tries seeking to deal with issues of environmental liability in privatization. These examples of good practice are replicable to the extent that environmental and natural-resource manage- ment issues are large relative to the macroeconomy. Madagascar, for example, is highly reliant on natural resources and has further potential to benefit from its environmental assets. Bulgaria faces a large amount of polluting waste products capable of damaging human health and other assets. In both cases there are clear economic benefits to dealing with environmental issues. Bulgaria stands to lose substantial sums if investors bid down prices for state assets as a result of concerns over the risk of environmental liability, and Madagascar risks, without better management, the collapse of a fishery that is a significant foreign-exchange earner. integration of forest-policy reform objectives While confirming that forest-policy reform into SA lending can bring about policy change. ultimately depends on domestic political Seymour and Dubash find that on the part of variables, the case studies indicate that there are the borrower, those conditions include opportunities for donors to cultivate coalitions constituencies for reform within the borrower for change. Where domestic commitment is government or civil society and opportunities lacking, donors can influence variables within for meaningful policy changes that do not their control to cultivate change. Donors can require extensive institutional reform to achieve this by broadening the scope of the implement. On the part of the donor, conditions reform program objectives to include include strong and consistent commitment to environmental quality, equity, governance, and the reform agenda and engagement with key reaching out to a larger group of stakeholders. stakeholders to define and communicate the objectives and strategy for reform. Environmental Economics Series 23 Effects Through Indebtedness 4 and Economic Liberalization 4.1 Debt and the Environment was also found between devaluation and deforestation for the period 1976­85. An early focus of studies of the environmental consequences of SA reforms was the specific role Using industrial logging as a gauge of of external debt in natural resource depletion deforestation can, of course, produce misleading and environmental degradation. Some authors results for countries where logging is not a have argued that developing countries were significant cause of deforestation or where forced to increase environmentally harmful, timber is derived mainly from plantation forests export-related activities in order to service their (Burgess 1992). A slightly different approach is external debts. This claim was most frequently adopted by Kahn and McDonald (1992, 1994). made in reference to tropical deforestation. In this case, high levels of debt are thought to Attempts to test this hypothesis include provoke countries to behave in a myopic elaborate econometric analyses of the proximate fashion, resulting in higher levels of causes of deforestation (see Burgess (1992) for a deforestation than would occur otherwise (Kahn review). However, the results of this research are and McDonald 1994). Economic variables are contradictory. grouped into factors that contribute to GDP (labor, land) and alternative "unproductive" For example, Capistrano (1990) and Capistrano activities including government spending, debt and Kiker (1990) test the significance of debt- service, and investment (despite the clear service payments as an explanatory variable for arguments that these are indeed often deforestation (measured in terms of industrial productive). Population is incorporated through round-wood removal from broadleaved forests). the definition of a minimum consumption standard. Covering 45 developing countries between the years 1967 and 1985, the model also includes a The main conclusions of the analysis are that range of other variables relating to the forestry variables that contribute to GDP should reduce sector, agriculture, and the economy as a whole. deforestation, while variables that compete for The debt-service ratio was found to be a the use of GDP should increase deforestation. significant explanatory variable for the years Debt is included in the latter group. The authors 1972­75 only and had a negative coefficient. find a strong positive correlation between This counterintuitive result may reflect the deforestation and public sector external debt, readiness of international capital markets to especially for the period 1981­85. offer credit during the early 1970s, which could have reduced pressures to sell off timber However, Young and Bishop (1995) criticize this resources. A positive and significant relationship approach for its arbitrary definitions of Environmental Economics Series 25 A Critical Review of the Literature on Structural Adjustment and the Environment productive and unproductive activities. For hypothesis, (2) estimation of the effects of example, public health and education changed scale and structure of the economic areconsidered unproductive activities despite activity using CGE models, and (3) sectoral their evident contribution to growth in GDP. analysis of the impacts on agriculture. The first Young and Bishop also criticize Kahn and two are presented below, and the analysis of McDonald's interpretation of the results. The agriculture in relation to liberalization is results indicate that debt and deforestation are presented in Appendix B. correlated over the period 1981-1985, but this does not mena that there is necessarily a causal 4.2.1 Pollution Haven Hypothesis relation between them. In effect, it is possible The hypothesis states that "dirty" industries that deforestation and indebtedness were both migrate to low-income countries after trade affected by the same set of circumstances, liberalization because of differences in costs of including influences from public policy. pollution abatement and looser environmental standards. Beghin (2000) provides an excellent 4.2 Liberalization and the Environment survey of literature on this topic, from which the SA reforms typically favor export industries and extract below was taken. tradable-goods sectors. Since many developing countries have a comparative advantage in "The available evidence of specialization in resource-intensive activities, critics have dirty activities by developing economies is suggested that SA programs stimulate inconclusive. There is convincing evidence that overexploitation of these resources, resulting in under an import substitution strategy, countries their rapid depletion and environmental have specialized in pollution-intensive degradation. manufacturing activities for which they are not truly competitive. Outward orientation has Runge (1993) gives five separate effects of trade reduced the pollution intensity of output in growth on the environment, namely the effects several countries through a composition effect on (1) allocative efficiency, (2) scale of economic (Birdsall and Wheeler, 1992). There is also activity, (3) output composition, (4) technology, evidence of lower energy intensity brought and (5) environmental policy. Heerink, about by a strong increase in the domestic price Kuyvenhoven, and Qu (1996) note that explicit of oil following trade liberalization (Vukina et al. accounting for changes in transport flows that 1999). result from trade growth is also needed. They also suggest analyzing the effects of changes in Similar findings emerge for natural resource the prevailing structure of trade impediments. use. For example, a recent study has assessed The two most relevant features are the the impact of trade liberalization on agriculture antiprocessed product tendencies of tariffs in and soil erosion in Sri Lanka (Bandara and industrial countries and the high barriers Coxhead, 1999). This study finds that openness against labor-intensive imports from poor increases the demand for land in tea production, countries. which is a relatively less erosive sector than other crops, and thus has environmental as well The main themes examined in the literature are as economic benefits for the Sri Lankan (1) cross-country analysis of the pollution haven economy. In the long run, an increased demand 26 Environment Department Papers Effects Through Indebtedness and Economic Liberalization for land has a positive impact on the emergence pollution appropriately (Pargal and Wheeler of land markets and reduces the uncertainty on 1996, Hartman et al. 1997). Furthermore, the returns to land conservation investment. resource allocation tends to be more efficient However, some countries do show patterns of under free trade because world prices are often specialization in dirty activities following trade closer to social prices than the former distorted liberalization: e.g., Indonesia (Lee and Roland- domestic prices. The energy content of Holst 1997, Strutt and Anderson 1999), China aggregate manufacturing output tends to (Dean 1999, Jha et al. 1999, Dessus et al. decrease with trade liberalization. Capital- forthcoming), Costa Rica (Dessus and Bussolo intensive dirty production relocates from 1998, Abler et al. 1999), and Turkey (Jha et al. developing to developed economies, where it is 1999). These countries are expanding or more resource-efficient and less polluting (Ferrantino and Linkins 1999). Vukina et al. specializing in activities that are harmful to the (1999) find a result consistent with that of environment. Both scale and, possibly, Ferrantino and Linkins in looking at the impact specialization induce environmental of market and institutional reforms on pollution degradation. There is no definite evidence on emissions and energy use in 12 former centrally which effect is dominant. Evidence reviewed by planned economies. The energy use per unit of Beghin and Potier (1997) suggests that scale aggregate product declines drastically with effects are most important. They find that market reform, although the decline in energy countries face more domestic pollution use may have been caused by the cleaner following trade liberalization because their composition of manufacturing output following aggregate activities have expanded, but not trade and price liberalization. necessarily because they are specializing in dirty activities. However, new numerical The findings just discussed are consistent with evidence from a study by Ferrantino and the earlier findings of Lucas et al. (1992). Linkins (1999), suggests that specialization is a Outward-oriented economies have lower more important determinant of pollution than pollution-intensity of aggregate output relative scale. These authors provide estimates of the to inward-oriented ones and have been output effects of trade liberalization (the exhibiting declining pollution intensities with Uruguay Round and a hypothetical outward-oriented growth in the 1980s. liberalization scenario in manufacturing) on However, the robustness of the systematic link toxic emissions using a multi-country, applied between openness and declining pollution general equilibrium model. Liberalization intensities of output has been questioned by slightly reduces global pollution by Rock (1996). Measuring openness and market rationalizing formerly protected sectors, which integration at the margin remains challenging in are pollution-intensive. Parts of Asia, as well as the context of large panel data of countries and the economies in transition may become more industries" (Beghin, 2000). polluted as a result of liberalization. 4.2.2 Estimation of the Effects of Changed Scale and Structure of the Economic Activity Using The specialization in dirty activities is not by CGE Models itself evidence of externalities, but there is evidence that environmental protection in many An example of the approach used in this type of countries does not internalize the cost of analysis can be found in Abler, Rodriguez, and Environmental Economics Series 27 A Critical Review of the Literature on Structural Adjustment and the Environment Shortle (1999). The authors' objective is to environmental impacts of trade liberalization examine the environmental impacts of trade might be greater in a country with greater liberalization in Costa Rica. They construct a preexisting trade distortions than those of Costa CGE model of the Costa Rican economy that Rica. includes eight environmental indicators. The indicators cover deforestation, pesticide usage, With this in mind, four major conclusions overfishing, hazardous wastes, greenhouse emerge. First, the directions of environmental gases, and urban air pollution. impacts of the trade-liberalization scenarios considered here are generally negative. In the This study is relatively unique in two respects. third scenario, which involves the greatest First, it explicitly recognizes and models degree of liberalization, five of the eight uncertainty in the values of the economic environmental indicators worsen in the case parameters in the CGE model. Rather than where technology is constant. In the case where picking one or a small number of "reasonable" technology is variable, six of the eight indicators parameter values, this study treats the economic worsen. Second, even though the directions of parameters of the model as random variables impacts are generally negative, the magnitudes drawn from prespecified distributions. of impacts tend to be small relative to the base- Evaluation of each policy option takes the form period values of the environmental indicators, of a Monte Carlo experiment in which a large in the sense that most indicators change by less number of random samples of the parameters than 5 percent. The two exceptions are are drawn, thereby generating an entire pesticides and organic wastes, where moderate distribution of results rather than a single set of increases (between 5 and 10 percent) in estimates. environmental pressures occur in some scenarios. Third, the positive environmental Second, unlike most other studies of trade impacts of the trade-policy changes considered policy in developing countries, this study are also generally modest, in the sense that permits technology to change in response to indicators that improve at all do so by less than trade liberalization. These changes in 10 percent. Fourth, the results for the case where technology, in turn, lead to changes in economic technology is constant are not substantially activity and the environmental indicators. For different from the one where technology is developing countries, the principal effects of allowed to vary in response to trade trade liberalization on technology are likely to liberalization. Nevertheless, the results differ in arise through imports of machinery and ways that are relevant to environmental quality equipment embodying new technologies. in some cases. The most important difference involves hazardous wastes, which decline Three trade-policy scenarios are investigated moderately given constant technology but little here. In the first one, ad Valorem rates for tariffs or even increase when technology is variable. are limited to 5 percent. In the second, export subsidies are also limited to 5 percent, and in Another study looking at scale and structure the third, import tariffs, export taxes, and export effects concluded that for Indonesia, there are subsidies are all limited to 5 percent. The positive structure effects but overwhelming authors caution that their results cannot negative scale effects (Munasinghe and Cruz necessarily be extended to other countries. The 1994) (for more detail see Appendix C). 28 Environment Department Papers 5 Conclusion The empirical research reviewed above does the complexity and scope of the problem. not resoundingly support or disprove the This is particularly significant for regional position that SA adversely affects the and time-series data, given the relatively environment. This highlights the difficulty of short period since SAPs were introduced. generalizing about the environmental impacts In some cases, qualitative data or resulting from SA, because the linkages are anecdotal evidence were used to often complex and case specific. Panayotou supplement sparse quantitative data, and Hupe (1996) find that most studies are which reduces the robustness of the model "ultimately ambiguous as to the net positive or results. negative environmental consequences" of SA. · Focus on regional issues. As this review has They also note that unambiguous statements illustrated, the impacts resulting from about the impact of SA are usually based on SAPs are very much dependent on regional speculation rather than empirical evidence. In factors. Qualitative evidence has fact, studies often appear to be biased, looking highlighted the varied impacts from a for evidence purely on the negative or the policy even within a country. This is shown positive impacts of SA. in the example of Tunisia, where homogenous subsidies were applied 5.1. Difficulties in Studying the throughout the country. Opposite effects Environmental Effects of SA were observed in different regions; in the The literature suggests that much of the north, the subsidies encouraged inability to draw a conclusion can be attributed intensification, which reduced to modeling constraints. The case -specific and environmental pressure, whereas in the dynamic nature of the SA-environment link, south, they led to severe environmental combined with the fact that the use of SA has degradation (see Appendix C.1). For a been relatively recent, creates significant model to successfully predict the obstacles to modeling and empirically environmental impacts from a SAP, estimating the relationship. Some studies have stresses Reed (1996a), it is important to overcome these problems more successfully understand the processes through which than others. Listed below are the main SAL affect the environment, including challenges that the literature suggests a reliable regional influences. This implies that any and robust model should overcome. policy should be evaluated on a case-by- case basis and the results from other · Absence of data. The problem of unsuitable situations should be transferred with or incomplete data is a serious one given caution. Environmental Economics Series 29 A Critical Review of the Literature on Structural Adjustment and the Environment · Economy-wide studies are needed. Pandey problem challenge current economic and Wheeler (2001) highlight that a study understanding. He does not propose a of one sector can lead to misleading specific framework but questions the conclusions. Their results show that standard model of SAP-environment although SA may have a strong impact on linkages. The author concludes that to individual sectors, the overall impact is anticipate the likely environmental neutral. consequences of policy reforms, multiple · Distinguishing between "with" and and comprehensive analyses accompanied "without" SA scenarios. The success or by discussion with experts and the people failure of a SAP should not be determined affected should be undertaken. purely by whether environmental · Interaction with other programs. Hansen and degradation has improved or worsened Hansen (1999) stress that the interaction since its introduction. There should be a among the World Bank, other donors, and clear definition of what would have local government further complicates the occurred in the absence of reform and study of impacts resulting from SAPs. They what impact the reform itself has had. The stress that SA programs cannot be studied Strategic Environmental Assessment model in isolation. The study of a single SAP in used by Kessler and Van Dorp(1998) and isolation may suggest that the program has Reed (1996a) overcomes this problem by been unfavorable to the environment, but comparing predicted trends in interactions with other complementary environmental degradation before the programs should be considered as on reform with post reform results. aggregate, they may have had a beneficial · Dynamic social fabric. An added complexity impact on the environment. to the study of predicted impacts of SAPs on the environment is that the problem is The above complications with studying dynamic. Reed (1996a) highlights that SA adjustment-environment linkages explain why may induce changes in the social and a resounding conclusion on their universal cultural fabric of the economy and that impact has not been reached. These are the key this must be included in the analysis. Maler constraints to mainstreaming the environment and Munasinghe (1996) also note that in SA lending. changes in behavior from SAPs may affect 5.2. Lessons on How to Reduce Negative environmental degradation. Reed states Environmental Impacts that where the distributional impacts of a program lead to an increased burden on The literature suggests certain lessons that may the poor, this could result in increased reduce the risk that SA will adversely affect the environmental degradation. Even if the environment. Where direct environmental incidence of poverty increases only in the impacts exceed an acceptable threshold or short term, the impacts on the indirect impacts via well-documented paths environment could be irreparable as are deemed excessive, the following issues may poverty-induced environmental be considered: degradation increases. · According to the studies, the trends and · Model deficiencies. Mearns (1991) suggests causality of environmental use should be that the complexity and dynamism of the identified along with the expected impacts 30 Environment Department Papers Conclusion on the environment following the SA. It (1996) finds that for price reforms, while should be noted that current trends of they hold the potential for positive environmental use may change during the economic and environmental impacts, program. these may not be realized without · The characteristics of an economy should additional policies. Bojö (1997) analyzes be taken into account when the SAP is World Bank studies, including Alicbusan being designed, according to Reed (1996) and Sebastian (1989), and Warford et al. and Kessler and Van Dorp (1998), among (1994) and concludes that the World Bank's others. For example, Kessler and Van Dorp view is that SAPs that benefit the economy (with the SEA approach) find that but have negative environmental effects economies that are highly resource may still be implemented, but mitigating dependent are more likely to intensify their policies should be designed to reverse the exploitation of the natural resource base at adverse impacts on the environment. least in the short term. "Impacts are · A key issue of concern to the World Bank is strongly different for low and high whether to include environmental external-input agricultural systems, fragile conditions as part of the SAL or to design and robust ecosystems, upstream and them outside the program. Reed (1996) downstream situations, situations of finds in the case study of Cameroon that resource scarcity and abundance" (Kessler the inefficacy of the SAP alienated some and Van Dorp 1998, p. 278). Reed also finds donors, with the result that many that the kind of economy undergoing complementary programs failed to reform is very important to its materialize. Therefore, Reed recommends environmental impacts. He finds that in that any complementary programs be general, extractive economies tend to included in the original SAP. However, if expand and intensify the extraction of environmental impacts emerge sometime natural resources under SA. In agricultural after the SA is implemented, then economies, the commercial and subsistence including conditions within the SAL is not sectors react quite differently. SA has feasible because monitoring is carried out tended to result in commercial farmers' for only six months after initialization. reducing pressure on the environment and Evidence of delayed environmental subsistence farmers' increasing pressure. A impacts is sparse. Pandey and Wheeler recurrent theme in the studies reviewed is (2001) consider the impact of SA on the strong influence that country specific deforestation and its changing trend over and regional factors play in the outcome of time. They find that the magnitude and the SAP. direction of the impact can change. For · The literature suggests that the planning example, SA initially reduced sawn-wood process may include detecting the need for imports in period one, but by the 12th year, remedial or additional policies to mitigate sawn-wood imports increased. This any adverse environmental effects or demonstrates that there are potential ensure the realization of environmental issues with lags in adjustment, although benefits. Maler and Munasinghe (1996) their occurrence and magnitude are not achieve this using a CGE model. Reed equal across sectors. More studies will Environmental Economics Series 31 A Critical Review of the Literature on Structural Adjustment and the Environment need to be completed before a conclusion is other ongoing activities. An ongoing Asian drawn. Development Bank (ADB) program loan · Equity issues may also be of concern. Some for fisheries and for a project for replanting of the studies reviewed in this paper mangroves dealt adequately with these purport that the impact of SAPs has had a areas, so the ENRSAL excluded policy disproportionate burden on the poor. measures for small-scale-capture fisheries. According to Gilbert and Vines (2000), the The interaction among programs, donors, erosion of natural resources may have and governments blurs the partial effects strong distributional impacts given the of an individual program, making it harder poverty-environment linkages. Reed (1996) to reach a conclusion on the program's finds that the benefits from SA have often success of failure. Complementary tended to accrue to the better-off sectors of initiatives may follow in time, so it is society, while the costs sometimes important to consider the dynamic nature associated with the process have fallen on of interdependency. those least able to absorb them. A potential response of these more vulnerable groups Given these lessons from the literature, it may is to increase pressure on the environment be advantageous to consider the following in order to survive. questions when designing a SAL: · Some studies claim that the environmental · Which sectors will be most affected by the impact will depend on how the SAP SAP? Are these sectors highly resource influences those groups of society who dependent? have most control over natural resources, · Will the current trends in environmental such as women and the poor. In the resource use change due to SA? Are these Cameroon case study, Reed (1996) due to changes in prices, the structure and highlights that in order to understand the scale of economic activity, income levels adjustment-environment links, a thorough and/or distribution, or environmental understanding of the role of women as management? cultivators, especially of food crops, and as · Will the impacts of SA fall disproportion- gatherers of fuel wood is needed. ately on certain segments of the · It has been suggested that where a SAP population? If so, will this result in overlaps with other projects implemented increased environmental degradation? by the World Bank, other donors, or Does SA affect those groups of society who government, the cooperation between have the most control over natural agents may greatly improve the efficiency resources, that is, women or poor people? and outcome of a program. Close · Can negative environmental impacts be coordination between donors and offset with additional policies? Can government avoids duplication, conflicting potential environmental benefits be advice, and counterproductive efforts. realized with the addition of policies or Hansen and Hansen (1999) give an institutional strengthening? example of a 1992 Environment and · Does the SAP overlap with other policies? Natural Resources Sector Adjustment Loan If so, will this interaction mitigate or (ENRSAL) that took explicit account of exacerbate environmental degradation? 32 Environment Department Papers Conclusion · Are there likely to be effects which only considered the relationship between the World emerge sometime after the SA has been Bank and the Government of the Philippines implemented? Can these effects be and determined that SAPs were "reasonably incorporated into the SAP, or should well designed". There is evidence supporting additional programs be planned? the view that there has been a shift toward greater emphasis on the environmental issues Many of these issues, which in some cases were in SAPs over time and more specifically since previously overlooked, are now being 1987 (the year of the Brundtland report (World considered in the SA process. The initial SAPs Commission on Environment and were not directly concerned with Development, 1987), and establishment of the environmental issues. Since then, the World Bank Environment Department). understanding of the development process has Hansen and Hansen find that where improved, and it is widely accepted that the environmental concerns have not been environment is a vital component to explicitly addressed within the SAPs, one will sustainable development. An internal review most likely find complementary lending of SALs in the Europe and Central Asia region operations by the Bank or by other agencies. found that that while there are important environmental issues that should have been In conclusion, the literature suggests that the addressed in the SA projects, the rating of this SA impact on the environment is indirect, group of projects has generally been complex, and dynamic. The studies also satisfactory from an environmental viewpoint highlight the many pathways by which the (Taylor, forthcoming). Hansen and Hansen environment and SA may be linked, which in (1999), focusing on SA in the Philippines, turn suggest a range of possible options for reviewed the body of literature on SAP- maximizing the positive impacts and environment connections that was available at minimizing the negative. the time the loans were prepared. They also Environmental Economics Series 33 AppendixA Theoretical Linkages between Structural Adjustment Instruments and Effects on the Environment Environmental Economics Series 35 36 Country/ Quanti- SA Instrument Policy Outcome Potential Environmental Impact Study Region tative Agriculture Devaluation Change in crop § Increased crop (­) Soil erosion Richardson (1996) Kenya No prices specialization (­) Water contamination Price § Strengthened (+) Increased investment in soil and Liberalization Donor assistance institutional capacity water conservation for research, § Increased technology (­) Increased vulnerability of poor to Institutional training, soil and adoption change in world prices (­) poverty- Reform water conservation induced environmental degradation (+) Conservation practices Institutional Establishment of § Increased incentives to (+) Investment in soil conservation Young and Bishop World No Reform tenure rights invest in perennial (1995) crops and Persson and Costa -Rica Yes intensification Munasinghe (1996) Financial Market Increase availability § Increased investments. (+) Investment in intensification Mink, (1992) Brazil No Reform of credit to poor § Crop switching. (+) More environmentally benign § Expansion of cultivated crop choice Opschoor and Jongma, Costa Rica Yes area. (­) Deforestation (1996) § Increased use of (­) Environmentally harmful activities Envir environmentally (for example, cattle ranching in onment harmful activities forests) Department Papers Envir onmental Country/ Quanti- Economics SA Instrument Policy Outcome Potential Environmental Impact Study Region tative Combined § Change in crop mix (-) Reduced soil productivity Wiig et al, (2001) Tanzania Yes Reforms § Change in use of inputs (-) Reduced soil depth (i.e. fertilizers) (-) Increased land use Series Combined Reduction in § Women are often (­) Short-term unsustainable Mackenzie (1993) África No Reforms women's responsible for the mining of the resource base income natural resource base in agriculture Forestry Price Reform Change in § Change in relative (+) Decreased agricultural land Barbier and Beghin Ghana Yes agricultural returns to timber expansion in Ghana (2000) prices production (+) Small decrease in timber § Interaction with extraction in Ghana Angelsen, Shitindi, and Tanzania Yes agriculture (­) Increase in agricultural land Aarrestad (1999) § Agricultural land expansion into forests in Tanzania expansion Price Reform Change in § Affects logging (­) Reduction in direct logging but Persson and Costa Rica Yes timber prices behavior ultimately increased deforestation Munasinghe, (1996) due to agriculture Public Sector Reduced public § Affects deforestation (+) Eases deforestation. Glomsrød, Monge, and Nicaragua Yes Reform expenditure through urban Vennemo (1999) migration Fiscal Reforms Increase in sales tax Flexible wage Devaluation § Increase in round- (­) Deforestation Pandey and Wheeler Cross- Yes wood production (2001) country Combined § Opposite impacts on (+/­) Net impact on round-wood Pandey and Wheeler Cross- Yes Reforms individual sectors production is negligible (2001) country 37 38 Country/ Quanti- SA Instrument Policy Outcome Potential Environmental Impact Study Region tative Water Sector Trade Reform Trade § Reduction in (+) More sustainable use of Goldin and Roland- Morocco Yes liberalization and agricultural water use water resources Host (1994) Price Reform efficiency pricing Yes of water Munasinghe and Cruz (1994) Combined § Reduction in the use of (+) Decrease in runoffs and Hughes and Lovei Transitional Yes Reforms fertilizers improvement in the water quality (1999) economies of shallow groundwater sources Combined § Reduction in water use (+) More sustainable use of Hughes and Lovei Transitional Yes Reforms water resources (1999) economies Wildlife Based Sector Public Sector Reduce public § Resources for (+) Initially negative but some Richardson (1996) Kenya No Reform expenditure managing wildlife have short-term evidence suggests decreased substantial improvement in § Exchange rates have management affected tourism § Institutional reforms Exchange Rate Increased § Switching from cattle (+) Wildlife-based activities are Munasinghe and Cruz Zimbabwe No tourism ranching to wildlife more environmentally benign (1994) Envir activities than large-scale agriculture Institutional § Investment in physical Richardson (1996) Kenya No onment Reforms and human capital Energy Department Pricing Reform Efficiency pricing § Switch to electricity (+) Reduce air pollution Meier, Munisinghe, and Sri Lanka Yes of power from dirty fuels Siyambalapitiya (1996) World Privatization Papers Envir onmental Country/ Quanti- SA Instrument Policy Outcome Potential Environmental Impact Study Region tative Privatization Institutional § Increased energy (+) Improved ambient air quality Hughes and Lovei, Transitional No Economics changes efficiency due to fuel switching (1999) economies Price Reforms Electricity tariffs § Increased incentives (­) Potentially harmful indoor Lampietti et al. (2001) Armenia No for use of wood- and pollution Remove coal coal-fueled stoves (+) Reduced health impacts from Hughes and Lovei Transitional No Series subsidies § Relative price of gas indoor air pollution (1999) economies falls, reducing demand for coal Urban Environment Public Sector Reduction in § Reduction in public (­) Untreated domestic and Reed (1996) El Salvador No Reform public services urban waste expenditure Trade Reform Economic § Increased migration to (­) Increased housing projects Riddell (1997) Africa No deregulation and urban areas due to requiring timber products openness increased economic (­) Worsening of urban air quality Onursal and Gautam Mexico Yes opportunities due to increased population (1997) § Increased imports of (+) Substitution away from new cars due to polluting, old cars openness Public Sector Reform Public Sector Cutbacks in § Reduction of services (­) Reduction in public services Postigo (1996) World No Reform public spending such as enforcement of responsible for environmental pollution standards quality and health Richardson (1996) Kenya No § Reduction in road (+) Settlement of frontier areas infrastructure projects (­) Isolation of region and Ozório de Almeida and Brazil Yes overreliance on natural resources Campari (1993) Governance Creation and § Internalization of (+)Improvement of Lopez, (1993) Ghana Yes strengthening of environmental environmental performance due Costa Rica environmental externalities to correct economic incentives Munasinghe and Cruz, Papua New Yes institutions § Catalyze key (+) Cultivate positive policy (1994) Guinea, environmental policy changes Cameroon, changes Seymour et al, (2000) Indonesia, No 39 Kenya 40 Country/ Quanti- SA Instrument Policy Outcome Potential Environmental Impact Study Region tative Effect of Indebtedness SA loans increase Reforms to § Pressure to service (+/­) Contradictory evidence Burgess (1992) the indebtedness service foreign foreign debt leads to of a country debt the use of harmful, export-oriented activities Liberalization Trade Reform § Migration of dirty (­) Under import substitution Beghin (2000) Yes industries to countries strategy, specialization in dirty with lower industries environmental (+) Outward orientation has standards reduced the pollution intensity of output (+) Lower energy intensity Trade Reform § Effect on technology (­) Variable technology seems to Abler, Rodriguez, and Costa Rica Yes adoption through worsen environmental indicators Shortle (1999) imports Envir onment Department Papers Appendix B Sectoral Analysis of the Impact of Liberalization on Agriculture Anderson (1992a, 1992b) uses a general least Lutz (1992), on the other hand, proves that in squares method to examine the effects of trade developing countries, the responsiveness of liberalization on grains, meat, dairy products production factors to agricultural price changes and sugar. Results of a reference scenario for depends on farm size. The responsiveness of 1990 are compared with results of a large farms is very significant, while the liberalization scenario in which all food-price response of small farms is comparatively small distortions in industrial and developing and inelastic for all factors of production. economies have been removed and full Therefore, increased agricultural prices will adjustment has been accomplished within the result in the more intensive use of resources and same year. This is a partial-equilibrium model, associated negative environmental effects of implying that the focus is on efficiency gains that subsector in countries with a commercial within agriculture. The simulation results farm sector. Lutz concludes that higher world indicate that the total world food production agricultural prices would lead to economic barely changes as a result of trade liberalization benefits for developing countries, but the but that the regional distribution of food associated environmental effects are expected to production changes considerably. There are be negative. However, Lutz emphasizes that production declines in Western Europe, Japan, because of the positive offsetting effects of North America, and East Asia and increases in higher income, empirical examination is China, Latin America, and sub-Saharan Africa. necessary to identify the impact unambiguously. With respect to specific effects on the environment, Anderson argues that there is an The criticism by Heerink, Kuyvenhoven, and exponential relationship between the price of Qu (1996) is that these studies make no farm output and the use of farm chemicals per distinction between environmental effects for unit of output. Therefore, the relocation of different groups of developing countries. For cropping production will substantially reduce example, in sub-Saharan Africa, the current use the use of chemicals in poor countries. In of chemicals is low and is projected to remain addition, urban environmental pressures will reduce the flow of labor to urban areas. unresponsive to higher output prices; however, Deforestation might be affected, but Anderson the use of chemicals will be beneficial to argues that land area is, significantly, the least restoring the nutrient balance in the countries responsive factor to changes in farm output there. Also, the reallocation of food production prices, and even if deforestation does occur, this might lead to higher environmental damage will need to be offset against reforestation on because of the erosive potential of certain crops, former farmland in developed countries. and increased trade aggravates transport- Environmental Economics Series 41 A Critical Review of the Literature on Structural Adjustment and the Environment related environmental externalities such as the soil degradation in low-income countries. The air transportation of kiwi fruits, eggs, and major problems they identified are soil erosion, flowers. nutrient depletion, salinization, water logging, and compaction. The authors distinguish four Additional considerations to those of the elements that will be affected by higher prices authors include, first, the possible changes in after liberalization: current versus future the structure of agriculture in developing production decision, farm practices, countries, such as a shift to large, industrial-size productivity versus conservation investments, farms, which will significantly alter the impacts and farmer private-discount rate. First, higher on the environment. Second, the evidence that output prices may induce farmers to increase deforestation is due to increased demand for their production at the expense of soil quality or agricultural land is mounting. In contradiction to cultivate marginal lands resulting in declines to Anderson's (1992a) conclusion that land area in land productivity. Important determinants in is by far the least responsive factor to changes in this case are input and output prices, private farm output prices, more recent studies such as discount rates, and land-tenure arrangements. Angelsen, Shitindi, and Aarrestad's (1999) Second, with respect to farm practices, it is the suggest that the main reason for deforestation is decision of the farmer whether to replenish the expansion of agricultural land due to higher topsoil's organic matter to prevent degradation. output prices. Finally, reforestation of former Third, higher incomes that result from price farmland in rich countries cannot be a surrogate increases permit farmers to undertake for deforestation in poor countries, where a productivity and conservation investments. The forest is a source of energy, fuel wood, and last significant point is that the farmer's private medicine. discount rate is affected by the change in prices. The authors' arguments are qualitative, so the Heerink, Kuyvenhoven, Qu (1996) further results are ambiguous. discuss the impacts of trade liberalization on 42 Environment Department Papers Appendix C Country Case Studies C.1. World Bank Studies sustainable agriculture during rapid and dramatic economic changes. They used farm- The extensive case level data and surveys of farmers' reactions to Munasinghe, M., and W. studies in this book the changes in strategic prices and policy Cruz. 1994. Economywide highlight five principle variables resulting from the economic changes. Policies and the Environment: ways that macro policies Farm models were designed using these data, Emerging Lessons from interact with the which were then used to simulate reactions to Experience. Washington, D.C.: environment: future changes in prices and so on. The World Bank. · Removal of price environmental implications of these predicted distortions, promotion of reactions may then be accounted for. While this market incentives, and model is location specific and only applies to relaxation of other constraints generally agriculture, it highlights the situation where the contribute to both economic and desired market liberalization still merits some environmental gains. government involvement to correct for market · Unintended adverse effects occur, however, failures. The studies on Costa Rica and Morocco when macro reforms are undertaken while use a computable general equilibrium (CGE) other neglected policy, market, or model to estimate the effects of introducing institutional imperfections persist. property rights on forest resources in the former · Measures aimed at restoring and the simultaneous introduction of trade and macroeconomic stability will generally yield water reforms in the latter. environmental benefits, since instability undermines sustainable resource use. Socioeconomic and land-mapping data are · The stabilization process may have combined to analyze the effects of ongoing unforeseen adverse short-term impacts on trade liberalization and public-employment the environment. reduction on agricultural productivity and land · Macro policies will have additional longer- use in the Ghana's western region. The authors term effects on the environment through found that agricultural-supply changes are employment and income-distribution associated with expansion of cultivated area changes. rather than with agricultural intensification. In Indonesia the authors investigated the The authors reach their conclusions by giving impacts of trade liberalization of the specific examples of effects from the country environment. They analyzed 14 years' of studies. Several research methods are industrial data up to 1989 and then projected employed. In China, the authors focused on Environmental Economics Series 43 A Critical Review of the Literature on Structural Adjustment and the Environment the likely impacts of continued reforms up to that the homogeneity of subsidies throughout 2020. The impacts of liberalization were studied the country was detrimental in some areas sector by sector. It turned out that the beneficial because it did not distinguish between effects on the environment from liberalization bioclimatic zones. The effects of these subsidies were twofold. First, liberalization promoted the had very different impacts in different regions. start-up of clean industries and second, it In the north of the country, and to a lesser extent induced a migration of dirty industry away the central regions, the subsidies encouraged from heavily populated areas, thus reducing the intensification and integration with cropping overall environmental burden. However, at the activities, whereas in the south, subsidies led to same time, liberalization promoted industrial severe degradation of range resources due to growth, which outweighed any positive effects excessive herding pressures. of the policy. Therefore, regulation is needed to In Zimbabwe the authors found that wildlife- curb the resulting environmental burden. based activities were less environmentally Mexico's situation under trade liberalization damaging than cattle ranching, which competes was analyzed more qualitatively by looking at for scarce resources. However, wildlife activities which sectors are promoted by free trade and are perceived as underutilizing land, so which sectors grew due to country-specific traditional pricing policies have supported forces. The authors conclude that industrial ranching. Foreign-exchange policy played an pollution has resulted from internal structural important role in this sector as the currency was changes rather than liberalization. overvalued by between 50 and 80 percent in The Philippines study looked at how policies on 1981­90, which resulted in what was effectively agriculture affect forestry through population- a tax on exports such as international tourism migration processes. The government policy of arising from wildlife-based activities. While favorably protecting corn crops, which is an economic liberalization has increased income upland, environmentally damaging crop, while and investment in the wildlife-based sector, it not supporting rice production in the lowlands, cannot be assumed that this has had a beneficial induces a migration pattern that exacerbates effect on the environment because the study deforestation. The authors find by econometric does not take into account the possible negative analysis and multinomial discrete choice effects, of such as large-scale hunting or tourism framework that migration decisions are most industries. responsive to lowland incomes. The analysis of the energy sector in Poland and Sri Lanka uses a similar approach, focusing on C.2. WRI and WWF Studies projections of energy generation and Using a CGE model, corresponding emissions from three different Cruz and Repetto Cruz, W., and R. Repetto. models, and concludes that additional show that 1992. The Environmental Effects environmental regulations are necessary beyond macroeconomic of Stabilization and Structural efficiency-improving price control. policies without Adjustment Programs: The The livestock sector in Tunisia is heavily adequate Philippines Case. Washington, subsidized with the intention of increasing self- environmental D.C.: World Resource sufficiency and making livestock products controls have Institute. affordable. The analysis of the subsidies showed increased emissions, 44 Environment Department Papers Appendix C -- Country Case Studies pollution concentrations and congestion, and than that of the Philippines, but a high pressure on open-access resources and have proportion of government subsidies was encouraged the overexploitation of depletable allocated to pollution-intensive industries. The resources. The study focuses on two periods in subsistence approach reduced an import- the Philippines: the 1960s and 1970s, which is substituting bias and increased the efficiency of considered to be the initial stages of the debt manufacturing, hence reducing pollution per crisis, and the 1980s, when stabilization and unit of output. However, a number of SAPs were implemented. "Adjustment reforms distortionary policies remained, such as a undertaken in the second period were further higher tax rate on organic than chemical assessed and compared to alternative reforms fertilizers, and serious market failures were not using a CGE model. Incorporating land as a addressed. These include open access to factor of production, the model assessed the resources and insecure land tenure and credit changes in land use associated with alternative rationing, which increases the difficulty for SA policies. Thus the model was able to small farmers to acquire better technologies. As highlight the effects of macroeconomic policy a result, some environmental problems simply changes in resource-intensive sectors such as took on new forms (overuse of some logging, fishing, mining, upland agriculture and agrochemicals, rather than extension of the energy supply" (Young and Bishop 19 95). agricultural frontier, for example), while others were exacerbated. This World Wildlife Fund (WWF) study provides The results of this study had a significant Reed, D., ed. 1992. Structural pre- and postadjustment impact on the adjustment-environment debate. Adjustment and the analyses of the Ivory They made an important contribution to the Environment. Boulder, Colo.: Coast, Mexico, and evidence for the direct linkages between Westview Press. Thailand. The book's macroeconomic reforms and the environment. format is unusual: Local research teams This study aimed to Reed, D., ed. 1996. Structural undertook most of the primary work, their extend the results Adjustment, the Environment results were interpreted and written by the from the first WWF and Sustainable Development. London Environmental Economics Center; and study outlined London: Earthscan. the overall conclusions were written by the above (Reed 1992) editor, a member of WWF. The quality of the and overcome some case studies is mixed, depending on the of its limitations. First, it tried to deepen the availability of data and previous research by the understanding of the relationship between country teams. Only in the Thai case were the macroeconomic reforms and environment data extensive enough to support empirical effects in a wider range of developing countries work; the other two studies mainly offer and strengthen the ability to predict these plausible hypotheses. impacts. Second, whereas the first study showed that the indirect impacts on the The Thai report reaches the same conclusions as environment through changes in the social the report by Cruz and Repetto (1992). structure are extremely important, the second Thailand's preSA economy was less distorted study tried to understand the impacts on the Environmental Economics Series 45 A Critical Review of the Literature on Structural Adjustment and the Environment social structure and hence the environment. It local circumstances. These were qualitatively also studied the long-term impacts of the studied and conclusions were reinforced by environment on sustainability and field surveys and opinions of local development. The nine country studies professionals. The analysis, conducted from a coordinated by the WWF and executed by local macro perspective, was complemented by a economic research institutes with the support of review of the issues at the grassroots level in the Overseas Development Institute (ODI) and four different but important regions: the fertile Harvard Institute for International farming area of the North-West Province, the Development (HIID) applied a sectoral populous but semiarid Far North Province, the approach, with case studies for certain cocoa-producing area of the East Province, and economic sectors and future-economic-growth the forestry economy of the South Province. patterns. The general method that was applied Data availability is patchy, impressionistic, and can be described as pragmatic and was based on sometimes anecdotal. The study concluded that the reconstruction of basic relationships SAP measures continued the bias of incentives between economic development and the toward extensive rather than intensive farm emergence of environmental problems over past cultivation. The more intensive use of existing decades. Changes during the SA phase relative land was penalized by the increased costs of to historical trends were analyzed and probable inputs, the shortage of credit, and the scaling causes identified. Two main methodological down of extension advisory services. This made difficulties were identified. First, with the felling trees more profitable than activities exception of Venezuela, each research institute related to other exports, whose selling prices experienced problems in obtaining consistent were reduced. The social repercussions of SA data on the economy and the environment over were intended to be offset by various actions to an extended period. Second, there were be undertaken by the World Bank and other difficulties isolating the impacts of structural donor agencies. In practice, the weakness and reforms on the environment from those that inefficacy of SA alienated some donors, and would have occurred had those reforms not many complementary programs failed to been implemented. Separating the "with materialize. The study concludes that social and reforms" from the "without reforms" scenarios environmental programs that are intended to was further complicated because SAPs were offset SA measures should be contained within implemented intermittently in several countries. the initial design of the SAP and not left to The scarcity of reliable quantitative data limited separate or subsequent programs. In addition, the applicability of CGE modeling and hence the authors (do you mean Reed (1996) instead? was used only for Venezuela, Vietnam, and If not, which authors?)note that the Pakistan. interpretation of the adjustment-environment links requires an understanding of the crucial Case Study for Cameroon role of women as cultivators, especially of food The approach followed in this study was crops, and as gatherers of fuel wood. eclectic. Researchers identified links between SA Case Study for Mali and the natural environment that seemed plausible on a priori grounds, based on their The approach undertaken was the same as that knowledge of SA, environmental processes, and for the Cameroon study outlined above. The 46 Environment Department Papers Appendix C -- Country Case Studies main effects identified from SA lending on the SA have clearly increased incentives for poor environment are increases in both the people to collaborate with the organized extensification and intensification of agriculture poaching gangs. The effects of SAP have been and long-term decline in soil fertility from mixed. The removal of restricted access to intensive cotton monoculture. foreign exchange has resulted in positive effects on the environment, whereas negative effects Case Study for Tanzania have occurred from the decreased funding for The research approach used in this study sought the National Parks and Wildlife Service. to identify the conceptual relations between Deforestation is another significant SAP and the environment while utilizing environmental problem, resulting primarily limited data and other information sources. (over 90 percent) from land clearing for There is a lack of deforestation data, but agriculture. The contribution of SAPs to anecdotal evidence suggests that deforestation accelerated deforestation is difficult to increases over time. Land clearing accounts for distinguish. The cut in the public works budget about 40 percent of deforestation in area terms. of the SA process may have contributed to the SA encouraged expansion of output at the same worsening urban water pollution. time as it increased fertilizer prices. The net effect was that the expansion of agricultural Case Study for El Salvador production through intensification was not The World Bank assumed a leadership role in viable for most small farmers. Soil erosion is advising and supervising the economic reform another major environmental problem. Since SA in El Salvador in 1991. The economy has been began in 1986, there has been a 17 percent increase in the area planted to the nine major growing at fairly high rates under SA, and the food and cash crops grown in Tanzania. Using most important contributors to that growth are Barbier's categorization of "erosive" and commerce, industry, and services in general, "nonerosive" crops, about 80 percent of this that is, economic activities that are highly increase was in erosive crops: maize, sorghum, concentrated in the metropolitan area and its cassava, cotton, and tobacco (Barbier 1991). The surroundings. Development activity in the regression analysis shows that for maize, rice, metropolitan area and migration from rural sorghum, and cassava (that is, the food crops), areas have led to acute problems in the urban the area cultivated increases as yields decline environment, including increased volumes of and vice versa for cotton and tobacco (that is, untreated domestic and urban waste, the cash crops). accelerated deforestation caused by the growth of housing projects and fuel-wood harvesting, Case Study for Zambia decreased potable water provision, and The research approach in this study is the same increased air contamination. In the rural as that for Tanzania. The main environmental regions, poverty has been exacerbated and problem in Zambia is loss of wildlife, which has because rural survival strategies are a major accelerated during the SAP period. The key factor in land degradation, this has led to higher cause of big game loss is from poaching for levels of erosion, sedimentation of major rivers trophies. The increase in urban unemployment and dams, and the general loss in the capacity and in erosion of farm incomes resulting from of the water resources. Environmental Economics Series 47 A Critical Review of the Literature on Structural Adjustment and the Environment The study does little to show the connection between SAPs and environment. The three most between rural poverty and World Bank SA important relevant elements are: lending. Overall, an attempt to distinguish · a reduction in public spending, which led to between the effects of SA lending on the one a direct weakening of state institutions and hand and country-specific developments and programs (particularly those of the Ministry external shocks on the other is not made. The of the Environment, MARNR) and had analysis focuses more on "before and after" indirect environmental impacts caused by than "with or without" the SAP. Only with the considerable increase in poverty; respect to institutional strengthening does the · encouragement of foreign investment, study concentrate on the link between SAPs and which permits the expansion of oil, mining, agriculture. The authors find that the most and tourist industries; and serious negative impacts of SAPs are those on · relaxation of controls, which allows institutional capacity, because the agricultural increased deregulated exploitation. agencies responsible for the small and medium- size agricultural producers lack sensitivity to With respect to institutional capacity, the author local conditions, have poor human resources points out that the SA process is influenced by management, and extension services are poorly replacing the cooperative action between located. environmental nongovernmental organizations Case Study for Jamaica (NGOs) with a struggle to obtain the scarce resources that the state is making available. The The only direct reference to the effects of the national park system has been affected in two World Bank's sponsored SA on the environment ways: directly by a reduction in the budget and is with respect to the government's capacity to indirectly as external factors put pressure on the deliver efficient social services. Environmental park system, resulting in a decline in effective institutions were badly weakened by the resources per unit area of national parks. reduction in public expenditures and redundancies in the public sector. The paper also notes that SA has affected the government's The study explores future impacts by simulating capacity to deliver efficient social services, three scenarios: (1) the "free market" scenario among them waste management. Except for this following the liberal market reforms introduced point on institutions, the study only investigates in 1989­93 under SA (free trade, crawling peg the effect of the overall Jamaican development exchange rate, increasing public spending); (2) approach, which did not explicitly incorporate "exchange control" policies introduced under environmental considerations. It makes no effort SAP in 1994, including exchange controls, price to distinguish the Bank's role, whether political regulation in some sectors, and stricter controls or economic, in influencing this approach in any on public spending; and (3) as the second way. In conclusion, the case study does not scenario but with an additional policy that provide reliable results about SA lending and would redistribute income to the poor at the the environment. expense of reducing profits. Each scenario is considered over the period 1994­2003 using the Case Study for Venezuela simulation model of the Venezuelan economy, The study is well supported by available data or the CENDES model. The results from the and draws a convincing causal relationship model, which are macroeconomic variables such 48 Environment Department Papers Appendix C -- Country Case Studies as total income and exports, are disaggregated elements of reform programs. It makes use of into production sectors using an input-output the Applied Economics Research Centre (AERC) matrix. The sectoral outputs derived are then tax policy simulation model. The fourth study fed into an equation that links economic and focuses on agriculture. It analyzes the impacts other indicators for each of the 38 subregions of of economic reforms on cropping patterns, Venezuela to calculate a measure of groundwater balances, and salinity for irrigated environmental quality. The impacts are crops in the Indus Valley, and it utilizes the calculated on the assumption that no further Indus Basin model (revised) (IBMR), a linear environmental measures are introduced to programming model development by the World mitigate environmental impacts. The main Bank. results from analysis of each of the scenarios are: The first model finds that the reforms alone · Wide variations in regional indices remain bring higher aggregate emissions compared in all the scenarios. However, the free- with the business-as-usual scenario, but it also market scenario varies the most. finds that there are larger numbers of people · Of the three, the scenario that is most with access to safe water and sanitation. The environmentally harmful is the free-market second model is a CGE model. The CGE model scenario. This is followed by exchange sacrifices the dynamic features of the growth controls and, finally, exchange control with model in return for rich detail on policy distribution. instruments. The functional forms in the CGE · The causal chain in the model is mainly are not estimated but are calibrated from the through a higher growth rate in general and values of parameters in the Social Accounting through activities of the more aggressive Matrix of 1984­85. In contrast to the growth industries (for example, mining and oil). model, the impact of economic reforms on the environment are positive through increased Case Study for Pakistan efficiency. The study considers that the CGE Four related, in-depth studies were conducted model is not dynamic and concludes that in the to analyze the impacts of economic reforms on absence of effective policy intervention, the the environment and society. The first is aimed rapid economic growth triggered by reforms at providing a rough long-run (50-year) picture will intensify most forms of environmental of the relationships among economic growth, degradation in the country in the short to population growth, and environmental medium term. The tax-policy-simulation model degradation in both the presence and absence of predicts that fiscal reforms can loosen the reforms, and it involved the construction of a current fiscal constraints on social and simple, long-run economic growth model. The environmental public-investment programs, second model complemented this analysis by which improve the quality of life of the poor. providing more detail on the impacts of specific The agricultural model, IBMR, concludes that reforms on individual sectors of the economy, price reforms need to be in effect for 18 although still in a macroeconomic context, using agricultural commodities, water, and fertilizer the CGE model. The third study addresses to see any significant change. Under this distributional impacts, focusing on the scenario, cropped areas in non-saline areas tend regressivity or progressivity of the fiscal to increase. Reforms are likely to increase the Environmental Economics Series 49 A Critical Review of the Literature on Structural Adjustment and the Environment aggregate application of fertilizer because the effects. The first finds that liberalization of effects of increased cropping outweigh the shift commodity trade may reduce the toward crops that are less fertilizer intensive. unemployment-related forest encroachment but will not halt it, thus requiring complementary The four analyses indicate that the reforms. The second scenario demonstrates the environmental and social impacts of SAPs in point that agricultural subsidies would not be Pakistan are complex and not unidirectional. an appropriate reform, neither in purely The CGE model predicts net environmental economic nor in sustainable-development benefits due to the shift away from heavily terms. The third simulation shows that more protected and polluting industries, such as secure property rights are a boon to both income textiles and leather, and the stimulation of more and employment generation through increased efficient energy use and other polluting inputs. productivity in land-based activities. The However, individual reforms that do not authors also conclude that clear property rights address sectoral distortions can worsen are the most effective way to promote long-run environmental degradation. horizons to resource users and more The other three analyses help address three environmentally and economically sustainable shortcomings of the CGE model: dynamics, practices. The fourth scenario considered a distribution, and environmental feedbacks. The redirection of some investment toward labor- three main conclusions are as follows: (1) long- intensive light industry and services away from run growth brings environmental deterioration capital-intensive heavy industry. This would as income levels are far below the turning point have created more jobs and have been less of the Environmental Kuznetz curve, (2) , the harmful to the environment. Fifth, the authors distributional implications of tax reforms are look at a reforestation program financed entirely detrimental to the poor; (3) the agricultural by a tax on logging and conclude that this sector increases its negative strain on the would bring a net gain in real income and environment. Because of the different employment. Last, the effects of an intersectoral methodologies, it is not possible to reconcile the transfer of income are considered, again with an conclusions of these four approaches. aim to remove externality-induced distortions. The model includes a 20 percent surcharge on Case Study for Vietnam energy prices, with the proceeds used to finance The study uses a CGE model, capturing the reforestation in watershed areas. An increase in impact of environmental changes on the real income and jobs is observed. 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