INTRODUCTION

Ramón López and Juan Carlos Jordán^*

The financing of sustainable development has been a topic of great concern since the Earth Summit held in Rio in 1992. At that meeting it was estimated that over US$600 billion a year would be needed to implement Agenda 21 in the developing world. It was also understood that some US$125 billion of this would come from grants and concessional loans from donor countries, an amount that was roughly equivalent to 0.7% of their combined GNP.

In the ensuing years the share of official development assistance never reached that Rio-commitment goal and in fact declined from 0.33% of GNP in 1992 to about 0.24% by 1999. This trend was not unexpected, and has heightened the importance of efforts to review and seek to enhance and improve innovative international and domestic financing mechanisms. Within the United Nations system, four expert-group meetings looking into this matter have been held since 1994. The last one took place in Santiago, Chile, in January of 1997, and its results were reported to the Special Session of the United Nations General Assembly of 1997.¹ At the Summit of the Americas on Sustainable Development, held in Bolivia in December of 1996, the countries of the Western Hemisphere expressed similar concerns and asked the OAS, along with other institutions, to assist in the quest for means of strengthening the financing of sustainable development.²

The present volume contains the papers presented at a technical meeting held in October of 1998 by the General Secretariat of the OAS on policies, problems, and financing of sustainable development in Latin America and the Caribbean. It constitutes a contribution to the effort of finding new ways of financing sustainable development in the region.

There has been a shift in how aid must be applied as the development process becomes more market-driven and more participatory. As a result, much needs to be done to restore donor support for aid. Greater overall transparency will help to reduce conditions that are tied to it and avoid any possible deviation from its intended use. Clear, sound, consistent economic, social, and environmental policies will also ensure that aid recipients are making a commitment to sustainable development that is worth supporting and ensure that the concessional support they receive is not working at cross-purposes or squandered.

Financial resources, while necessary for sustainable development, are not sufficient to ensure that it is attained. Much more is needed. Developing countries must put the right policies in place, seeking for each country an appropriate balance of its economic, social, and environmental concerns to ensure sustainability. The application of such policies will permit better use of existing aid and also mobilize additional resources. It will also guide consumers and producers toward more sustainable patterns of behavior. In fact, proper policies will minimize environmental degradation and thus hold down the costs of repair. They will also make complying with environmental rules and regulations less costly.

An added benefit of sound policies is that they will enable countries to attract and make better use of net foreign private capital flows, including direct and portfolio investment. It has been argued that such flows should play an increasing role in financing sustainable development. Foreign direct investment (FDI), which provides risk capital that can contribute to growth, poverty alleviation, improved skills, and environmentally friendly technologies, has in fact increased considerably since the Earth Summit. In 1998 FDI flows to developing countries were about US$155 billion, with about US$58 billion, or 37% of that, going to Latin America and the Caribbean. ³

This volume integrates different aspects of the policies, programs, and financing for sustainable development. The main conclusions can be summarized into three broad categories: (1) the promotion and financing of better monitoring of certain key environmental resources and ways to improve the enforcement of existing environmental laws and regulations; (2) global externalities and the potential of trade in carbon-emission rights as a mechanism to enhance biodiversity conservation and forest protection and raise financial resources for sustainability; and (3) market-based instruments (MBI) versus command-and-control mechanisms (CAC) as instruments to control pollution and  mobilize financial resources for sustainability.

The monitoring of environmental resources is a precondition for any program of environmental sustainability and is an area where international cooperation is essential. The establishment of systems of environmental information could also facilitate capacity building by promoting technical cooperation and expertise among environmental officers in the public and private sectors. Additionally, the issue of enforcement is critical in the region. Most problems of environmental waste are due not so much to lack of environmental laws, which in many cases are extraordinarily comprehensive, as to insufficient enforcement and to the design of the legislation that sometimes makes it difficult to enforce. Further, more efficient monitoring systems and the enforcement of environmental laws would generate additional savings by reducing the costs of repairing damage done to the environment.

Among the key topics considered within the broad category of “monitoring and enforcement” are those issues related to institutional reform and build-up, private enforcement, and environmental fines and their earmarking for environmental institutions. One special related issue concerns the problem of enforcing environmental regulations on public agents.

The existence of global externalities (related to greenhouse gases and biodiversity) can potentially be a source of opportunities to enhance trade in environmental services (most notably in natural forest and biodiversity conservation) between the region and the developed countries. Large volumes of financial resources that can be used to finance many initiatives can be raised through this mechanism. This opportunity is greatly enhanced by the recent Kyoto meeting.

The specific conclusions that emerge from the studies in these areas are the following:

Monitoring, Enforcement, and Institutions

A necessary condition for proper environmental enforcement is the development of adequate environmental institutions. The underdevelopment of private environmental institutions (property rights, markets, etc.) seems to be related more to endogenous factors associated with lack of economic incentives for their establishment than to exogenous factors. Hence, it seems indispensable to explore policies that can increase the economic incentives for the development of institutions in the private and public sectors.

The development of public environmental institutions is another essential condition for adequate environmental monitoring and enforcement. Earmarking, in particular of fines and charges for public services, is potentially valuable, not only as a mechanism to provide automatic financing for public agencies in charge of environmental enforcement, but also as an incentive for institutional build-up among such agencies. Environmental agencies could use part of their earmarked revenues to improve their human and physical capabilities to do their work.

Partly because of a lack of full understanding of environmental effects and partly because of lack of enforcement capacity of the officials in charge of the environment, public polluters act with relative impunity throughout the region; in some cases they constitute the principal source of pollution. For instance, the experience in the Cauca Valley in Colombia shows that, although the mechanisms in place were successful in controlling pollution from private agents, the overall environmental gains were undermined by the lack of compliance on the part of the local public utilities. It is essential to consider these public polluters in the design of appropriate environmental regulations, and especially with regard to mechanisms that involve private participation in the enforcement of the regulations.

An interesting issue emphasized in the papers is the necessity of establishing environmental legislation and regulations that are both realistic and feasible to enforce, as opposed to the old laws that tended to set excessively ambitious standards and thus were extremely difficult to implement.

Environmental fines not only play a substantial role as methods for raising revenues but, more importantly, represent important compliance mechanisms. They might be a good way to raise revenues for environmental mitigation from polluters themselves. This could considerably increase the fairness of these programs and thus increase their public support.

International Trade in Global Environmental Services

The region has enormous financial needs for sustainable development. Local sources are unlikely to be sufficient to cover even a relatively small fraction of these needs. Traditional international aid for the environment has not been in the past a significant source of funding, and it is likely to shrink even more in the future. An important, yet unexplored, option is to obtain such funding through international trade in global goods, particularly in climate services provided by the region’s large remaining tropical forest.

It is shown that the region could obtain large net financial revenues by participating in world trade in carbon emissions, provided that the North explicitly recognizes deforestation as a source of carbon emission. In this scenario, the region could sell part of its deforestation rights and obtain huge financial revenues without compromising its future economic growth. Additionally, those revenues should dramatically increase the value of standing forests, thus providing incentives for the establishment of effective property-rights institutions in forested areas. The region should therefore become fully involved in the global efforts to reduce carbon emissions by trading permits, developing a set of specific conditions required for such participation.

MBIs versus CACs

To avoid the risks of spreading the regulatory efforts too thin among a variety of MBIs and CACs, there is a need to establish priorities on the specific areas in which each would be applied. Although MBIs are not a panacea, these mechanisms are potentially attractive in the sense that they may be more efficient than CACs under certain conditions, or can complement CACs. However, the papers identify instances where CAC instruments should continue to be used. It seems that, while some progress has been attained in the management and control of point sources of water pollution using CACs and sometimes MBIs, there is a significant imbalance with respect to non-point sources. It may be important to explore inexpensive ways of tackling some of these as well.

NOTES

1. United Nations,  Finance for Sustainable Development: The Road Ahead, New York, 1997.

2. See Declaration of Santa Cruz de la Sierra and Plan of Action for the Sustainable Development of the Americas.

3. World Bank, Global Development Finance 1999, Chapter 3, Washington D.C., 1999