A Critical Review of the Literature on Structural Adjustment and the Environmentdocuments.worldbank.org/curated/en/490191468763832797/... · 2016-07-17 · A Critical Review of the

E N V I R O N M E N TA L E C O N O M I C S S E R I E S

A Critical Review ofthe Literature onStructural Adjustmentand the Environment

Anna Gueorguieva and Katharine Bolt

PAPER NO. 90

April 2003

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Papers in this series are not formal publications of the World Bank. They are circulated to encourage thought and discussion. The useand citation of this paper should take this into account. The views expressed are those of the authors and should not be attributed tothe World Bank. Copies are available from the Environment Department, The World Bank, Room MC-5-126.

A Critical Review of theLiterature onStructural Adjustmentand the Environment

Anna Gueorguieva and Katharine Bolt

THE WORLD BANK ENVIRONMENT DEPARTMENT

April 2003

The International Bank for Reconstructionand Development/THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

Manufactured in the United States of AmericaFirst printing April 2003

iiiEnvironmental Economics Series

Contents

ABSTRACT v

ACKNOWLEDGMENTS vii

ABBREVIATIONS ix

Chapter 1Introduction 1

Chapter 2General Approaches 3

2.1 Approaches for Evaluating Effects of SAPs on the Environment 32.1.1 Strategic Environmental Assessment (SEA) 32.1.2 Village-Economy-Wide Model 62.1.3 Social Dimension 62.1.4 Second-Best Theory 62.1.5 Four-Dimensional Analysis 82.1.6 Accounting for Chaotic Effects 82.1.7 Computable General Equilibrium (CGE) Models 9

Chapter 3Sectoral Analyses 11

3.1 Agriculture 113.1.1 Substitution Effects 113.1.2 Income Effects 123.1.3 Land Prices and Tenure 123.1.4 Agricultural Credit 133.1.5 Full Effects of Structural Adjustment 14

3.2 Forestry 153.3 Water Sector 173.4 Wildlife-based Sector 183.5 Energy 183.6 Urban Environment 203.7 Public Sector Reform 213.8 Governance 22

iv Environment Department Papers

Indicators of Environment and Sustainable Development — Theories and Practical Experience

Chapter 4Effects Through Indebtedness and Economic Liberalization 25

4.1 Debt and the Environment 254.2 Liberalization and the Environment 26

4.2.1 Pollution Haven Hypothesis 264.2.2 Estimation of the Effects of Changed Scale and Structure of the Economic Activity Using

CGE Models 27

Chapter 5Conclusion 29

5.1 Difficulties in studying the environmental effects of SA 295.2 Lessons on How to Reduce Negative Environmental Impacts 30

Appendix ATheoretical Linkages Between Structural Adjustment Instruments and Effects on the Environment 35

Appendix BSectoral Analysis of the Impact of Liberalization on Agriculture 41

Appendix CCountry Case Studies 43

C.1 World Bank Studies 43C.2 WRI and WWF Studies 44

REFERENCES CITED 51

ADDITIONAL REFERENCES 56

BOXES

1 Structural Adjustment Defined 22 The Energy Sector in Transitional Economies 203 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

vEnvironmental Economics Series

Abstract

This paper analyzes the available literatureabout the effects of structural adjustmentprograms (SAPs) on the environment and theconvincing evidence for their success orfailure. The studies covered refer to the SAPsby the World Bank as well as to generalgovernment programs that have similar policyimplications. SAPs are designed to reformeconomies to become more liberalized andexport-oriented while reducing the role ofgovernments that have become inefficientbureaucracies. Because of the implications ofpolicies such as debt accumulation and trade, aconcise literature review on debt and tradeliberalization is also included.Despite the controversy surrounding structuraladjustment and the environment, the debatehas been largely based on anecdotal evidenceand country case studies. Most of the studiesreviewed are not quantitative and have notapplied rigorous statistical methods. Theconclusions of studies on the effects ofstructural adjustment (SA) on the environment

are strongly influenced by what is examined,the sectoral level, and the stage of the SAprocess. The infrequency of high-caliberstudies is due to data scarcity and statisticallimitations.There is little reason to doubt, however, thatover the longer term, the sorts of changes inincentive structures and relative price changesbrought about by SA lending will have animpact on the environment. Economiesundergoing SA will experience both growth(assuming the success of SAPs) and structuralshifts, which will affect the extraction ofnatural resources and the level of pollutionemissions. The evidence presented in thestudies reviewed highlights that the net effectof SAPs on the environment has been varied:sometimes positive and at other timesnegative. The papers surveyed emphasize thedifficulty in generalizing about the directionand magnitude of these environmentalimpacts, as the linkages are complex and casespecific.

viiEnvironmental Economics Series

Acknowledgments

The authors would like to thank Kirk Hamiltonfor his support throughout this project and

Ksenya Lvovsky, Muthukumara Mani, Tim

Taylor, Ken Greene, and Olivia Cowley fortheir useful comments. We are indebted to

Cynthia Allen who helped edit the report. Allremaining errors are ours.

Anna Gueorguieva may be reached at:University of California, Berkeley. E-mail:[email protected].

ixEnvironmental Economics Series

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

1Environmental Economics Series

1 Introduction

The inception of structural adjustmentprograms (SAPs) followed the oil crisis of the1970s, the deepest global recession since theGreat Depression, and the developing-countrydebt crisis of the 1980s. With many of theworld’s economies floundering, the firststructural adjustment loan (SAL) wasimplemented in February 1980. SAPs aim torestore economic growth through stabilizationin the short run and adjustment in the mediumterm. They are utilized by several of theinternational financial institutions, mostnotably the World Bank and IMF, but also someof the regional development Banks includingthe Asian Development Bank and AfricanDevelopment Bank.

While SALs are linked to programs ofeconomic and policy reforms, sectoraladjustment loans (SECALs) are linked tosectoral reform programs. The maininstruments of adjustment are changes intaxes, tariffs, quotas, subsidies, price controls,public expenditure, and trade reforms.Recently governance, private sectordevelopment, and deregulation reforms havebeen important elements of SA. These policiesare designed to promote a more open,competitive economy with fewer distortions,thus easing the response of the private sector toless distorted or undistorted market signals.

The economic success of structural adjustment(SA) has been patchy, and it has faced heavy

criticism from some parties regarding its socialand environmental impacts. The focus of thispaper is the impact that SAPs have had on theenvironment. SA critics argue that SAPspromote increased resource use, thusundermining sustainability as a country haslittle capacity to protect the commons, whichresults in excessive exploitation. Theproponents of SA have stressed the “win-win”potential of SAPs because by removingdistortions and enhancing productivityefficiency, SA should reduce resource wastage.This should at least in part compensate for anymovement into the competitive-advantagesectors that are resource and/or laborintensive in low-income countries. If SAincreases prosperity, that will promote greaterinterest in environmental protection andcreate resources to finance the protection.

Both arguments are reasonable on a priorigrounds, so it is possible that SA will havenegative and positive impacts. Determiningthe net impact of SA is an empirical issue. Thenet effects of SAPs on the environment havebeen varied: sometimes positive and at othertimes negative. It is difficult to generalizeabout the environmental impacts resultingfrom SAPs because the linkages are oftencomplex and tend to be case specific. Pandeyand Wheeler (2001), Dixon, Simon, andNarman (1995), and Panayotou and Hupe(1996) suggest that the conclusions of theirstudies are highly dependent on the geographic

Environment Department Papers2

A Critical Review of the Literature on Structural Adjustment and the Environment

or sectoral coverage, the motivatingassumptions, and the depth of analysis. Inorder to conclusively determine the net impact,Pandey and Wheeler show that anencompassing, in-depth study is required.Given data scarcity and statistical limitations,quantitative, high-caliber studies areinfrequent.

This review starts by looking at recent, morequantitative approaches to analyzing the effectsof SAPs. Evidence of the environmentalimpacts of sectoral measures of the programs,debt accumulation and trade liberalization isthen examined. The review concludes with apresentation of country case studies and policyanalysis of World Bank SAPs.

Box 1.Structural Adjustment Defined

Structural adjustment loans (SALs) provide quick-disbursing assistance to countries with external financingneeds to support structural reforms in the economy as a whole. Sectoral adjustment loans (SECALs) supportreforms 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).


General Approaches22.1. Approaches for Evaluating Effects ofSAPs on the Environment

Theory identifies several channels throughwhich SAPs can potentially affect theenvironment. First, changes in input and outputprices can affect resource use. Second, SAPreforms influence the structure and scale ofeconomic activity. This in turn can increase ordecrease the level of environmentally harmfuleconomic activities. It may also lead to increasedspecialization in certain activities. Third, incomeeffects can affect the use of natural resources,either positively or negatively. Where segmentsof society are adversely affected by the SAP,this may lead to an increased reliance on anddegradation of natural resources. Lastly, SAPscan affect environmental management byaltering public finance and by impactinginstitutions and governance. All these effectsare dependent on the initial conditions and theenvironmental and social characteristicswithin the country. Table 1 summarizes theabove theoretical linkages.

Each SAP is a combination of several reformsthat combine through diverse channels toaffect the natural environment. The individualeffect and relative significance of each reform-environment channel need to be evaluated andcompared with the impacts from otherchannels. Therefore, the net effect is ambiguousand needs to be addressed empirically. In theremainder of this section we present some

recent approaches that have been developed toestimate the effects of SA on the environment.The scope of the reviewed studies is focused onresearch questions that directly address SAPsand excludes studies of particular reforms thatmight be part of SA (such as devaluation,foreign direct investment, and privatization). Insection III, case studies are presented by sector.

2.1.1 Strategic Environmental Assessment(SEA)

The SEA is a systematic process for evaluatingthe environmental consequences of proposedpolicies, plans, or program initiatives. Ingeneral, it has been applied in the sectors ofenergy, transport, and waste management butrarely in the context of policy and planningevaluation. Kessler and Van Dorp (1998)develop a methodology to assess the impact ofSAPs on natural resources and their basicvalues for human society. It focuses on soil,forest, and water resources. The analyticalframework emphasizes the:• Environmental quality of soil, water, and

forests and the requirements for theirsustainable use

• Environmental regulation or stabilizationfunctions of these resources and theconsequences of these impacts on humansociety (instead of solely short-termproductive assets)

• Long-run consequences and thresholds ofenvironmental degradation for differenthuman systems using these resources.



The analysis develops a model thatincorporates resources differentiated by typeand use. Indicators on the state of the resourceand trends are then included, and the impactsof SAPs on these resources is then examined.The model combines both quantitative andqualitative methods. Quantitatively, the studycompares the environmental indicator trends fordifferent types of water, soils, and forests withthe social and economic indicators that weredirectly influenced by SAP measures. Forexample, the implementation of SAP measurescoincides with a decline in the use of fertilizersin low-external-input agriculture and anincreasing consumer price index, indicating apossible relationship between SAPimplementation and future soil depletion.

Qualitatively, this paper incorporates thefindings and developments of case studies.Difficulties with the model include:• A shortage of reliable quantitative data,

especially long-term data, state indicators ofenvironmental qualities, and data on issuesrelated to regulation, diversity, and culturalfunctions of natural resources

• The absence of regional statistics (nationalstatistics can hide important regionalvariation and are often inadequate forunderstanding specific dynamics)

• Uncertainties with respect to the “SAPimplementation gap” in the nine countriesreviewed

• The short period since major SAP measureswere implemented.

Theoretical channels

Example of potential impact

on the environment

Approaches used

to examine channel

Removal of price distortions

( + ) Movement away from coal use tocleaner fuel( – ) Reduced use of fertilizers, affectingsoil degradation

• Strategic EnvironmentalAssessment

• Second-Best Theory• Four-Dimensional Analysis

Change in structure andscale of economic activity

( + ) Movement away fromenvironmentally damaging activities( – ) Increased specialization in erosivecrops

• Strategic EnvironmentalAssessment

Changes in income levelsand income distribution

( + ) Poor movement away fromenvironmentally damaging activities tojobs in new sectors( – ) SA creates deeper poverty forcertain segments of society, forcingthem to marginal agriculture

• Social Dimension• Sectoral Models:

Agriculture and forestrysection

Change in environmentalmanagement

( + ) Public sector moves away fromactivities in which it is inefficient tospecialized activities such as protectingpublic commons( – ) Reduced public sector budget forprotecting natural resources orenforcing regulations

• Social Dimension• Sectoral Models: Public

sector and governancesection

Table 1. Theoretical channels through which SAPs influence environmental conditions


General Approaches

The analysis yields some interesting results,however:1. In situations characterized by high-external-

input agriculture (HEIA) and in areas withhigh agricultural potential, SAPs have apositive impact by reducing environmentalpollution. Here, the declining subsidies onagrochemicals have led to reduced overuseof fertilizers, pesticides, and machinery.This reduction in subsidies has alsostimulated the adoption of moreenvironmentally sound practices such asintegrated pest management (IPM) andzero-tillage. SAP measures have furtherreduced pollution in these areas through thedismantling of highly inefficient parastatals(for example, cocoa board in Cameroon).However, in situations characterized bylow-external-input agriculture (LEIA) andin areas with low agricultural potential,identical SAP measures have resulted innegative impacts by reducing already lowlevels of external inputs. This forces farmersto increase their use of organic matter andto overexploit soil fertility (causing soilmining and soil depletion) or expandingcroplands (causing deforestation).

2. SAPs have stimulated the expansion of cashcrops, which may in turn increase thefeasibility of external inputs and technology.This can also lead to increased deforestationand excessive pesticide use. Land tenure,agricultural extension, the diversity of theagricultural system, and the value of forestfunctions for local communities appear tobe key underlying factors.

3. In some countries, SAPs have stimulatedrural emigration—through deterioratedagricultural input-output ratios and theenhancement of opportunities in urbanareas—resulting in reduced rural pressuresbut increased urban pressures. In other

countries, SAPs have had the oppositeeffect, stimulating urban emigration due toincreased urban unemployment. The resultis an increase in rural pressures, such as theencroachment of marginal lands. Culturaland social ties, living standards, and therelationship between rural and urbanincomes and social services, appear to beunderlying key factors.

4. In some cases, SAPs have stimulated ashort-run reduction in the number oflivestock due to a reduction in their valuevia trade liberalization. This has reducedenvironmental pressures. However theopposite effect has been observed in high-potential areas where land is easy topurchase and land-management regimes arenot put in place or respected (for example,Venezuela).

5. The accelerated expansion of croplands andthe encroachment of marginal land alreadycaused by population pressures areexacerbated by SAPs. This has resulted inenvironmental degradation of fragileecosystems, such as mountainous areas,semiarid lands, coastal zones, and wetlands.

6. Some SAPs have resulted in increased tree-planting initiatives and improved localforest management regulations throughincreased prices for fuel wood and energysources, mainly in urban centers. However,tree-planting initiatives focus on theproductive properties of trees, emphasizingthe use of rapidly growing tree species inmonocultures while disregarding otherforest services such as safeguardingbiodiversity and preventing soil erosion.

7. SAPs have accelerated the use of waterresources by economic sectors—such asindustries, mining, tourism, andirrigation—through the creation of damsand reservoirs.



The above results reinforce the point that theSA planning process should include detectingthe need for remedial or additional policies tomitigate any adverse environmental effects or torealize the environmental benefits. The negativeeffects described above do not prohibit thesuccess of SA if the right controls are put inplace. In each case, the understanding ofinstitutions and governance are critical to asuccessful SAP.

2.1.2. Village-Economy-Wide Model

Village economies and peasant householdsrepresent the main link between the economyand the environment in sub-Saharan Africa,because the environment or natural resourcebase is a key input in their production systems.Holden, Taylor, and Hampton (1999) present atypology of village economies and village-economy-wide models. The framework isapplied to a specific case of a remote Zambianvillage that is characterized by a missing ornegligible labor market, input supplyconstraints, and credit rationing. The impacts ofexternal shocks, including SAPs, on cash-cropproduction and chitemene (shifting cultivation)are then examined. The findings indicate that bydecreasing the profitability of maize production,SAPs may encourage households to increasetheir chitemene production, resulting in morerapid deforestation. The changes predicted bythe use of the model are close to responsesstated by farmers in a survey of 150households.

2.1.3. Social Dimension

The following approach was developed byReed (1996b). It stresses the need tounderstand the processes through which SAPsaffect the environment. SAPs rarely affect theenvironment directly, but their effects aretransmitted through society via changing class

structure, shifting social relations, andevolving institutions. Two case studies, inVenezuela and El Salvador, highlight that theeffects of migration, poverty, nongovernmentalorganizations, and social relations andinequities should also be considered if acomplete understanding of the environmentalimpacts of SA is to be possible (see AppendixC.2). Because social relations in adjustingsocieties change, such reforms can havenegative long-term environmental impacts. InVenezuela, urbanization intensified urbanenvironmental degradation, and in ElSalvador, watershed management deterioratedbecause of consolidated social and economicrelations that generated an environmentalcrisis. Reed’s study claims that these casestudies raise questions about the viability of anSA “win-win” strategy that encouragespolicymakers to give priority to policy reformsthat increase economic efficiency while alsogenerating positive environmental changes.The case studies do highlight the importance ofthe social dimension to the success of a SAP,but it is difficult to attribute the negativeenvironmental impacts to SA alone. Theanalysis underlying the study’s conclusions isbased on a before-and-after scenario andignores the entanglement between new and oldpolicies. In addition, the study was unable toconsider the true outcome of the SAP byconsidering the counterfactual (what wouldhave occurred in the absence of the policy).

2.1.4. Second-Best Theory

Maler and Munasinghe (1996) develop a basicanalytical framework to trace theenvironmental impacts of macroeconomicpolicies, particularly to identify whereunforeseen negative environmental effectsmay occur, and to design remedial measures.Their model finds that it is the combination of


General Approaches

macroeconomic policies and subsidiaryimperfections (policy, market, or institutional)that leads to environmental degradation. Thefirst-best remedy would be to eliminate thesesubsidiary imperfections without changingmacroeconomic policy. Maler and Munasingheargue that imperfections may remainunnoticed in a stagnant economy, but aseconomic growth is induced by policy reforms,environmental damage may rapidly worsen. Ifconstraints prevent or delay the correction ofimperfections, then a second-best situation willarise. In such cases, modifying or fine-tuningmacroeconomic policy reform can be justified.There is also a dynamic element in whichmacroeconomic reforms could be intensifiedover time as the subsidiary imperfections aregradually eliminated. The authors summarizethree case studies to illustrate howmacroeconomic policies might combine withlocal imperfections to harm the environment.

Unemo (1996) presents a case study inBotswana that focuses on land pressures fromlivestock farming. In Botswana land pressure ismost serious in the livestock sector, whereovergrazing is common. Several direct andindirect incentives for livestock to overgrazestem from government policy. For example, thegovernment provided various forms of financialassistance such as subsidized inputs and fiscalincentives to the livestock sector. Thisencouraged livestock holdings and thusincreased overgrazing. Other policies, such asthose on trade and labor, also exacerbated thisproblem. Using a computable generalequilibrium (CGE) model, Unemo analyzedimpacts on the environment resulting frommacroeconomic policies. Five policy changeswere monitored, and their resultingenvironmental impacts include a fall in the priceof diamonds (which is the most significant

export in Botswana), deterioration in trade,reduction in the import tariff, a decline in theforce of unskilled labor, and an increase inforeign earnings. The most dramatic impact onthe environment was observed from a fall inthe price of diamonds, which led to aconsiderable increase in land pressure. This isexplained by the fact that reduced incomefrom diamond mining led to a fall in thedemand for manufactured goods. A fall in thecost of capital increases the comparativeadvantage from investment in the livestocksector, increasing land pressure. In two out offive experiments, economic welfare (measuredas GDP) fell as land pressure increased. In theother three experiments, the reverse was seen:GDP increased with an increase inenvironmental well-being as land pressuredeclined. This supports the opinion that thereis not a straightforward relationship betweenthe growth in GDP and the state of theenvironment.

While results from CGE models are criticizedbecause of uncertainties surrounding the dataand theoretical understanding, Unemo’s studyillustrates that CGE can be used to highlight theimpacts resulting from SA. CGE modeling canbe used to identify the impacts on theenvironment, and where environmentallydamaging policies cannot be avoided,additional measures could be designed to offsetthese negative impacts.

Another case study, by Lopez (1993), focuseson Ghana and concludes that in general, priceand wage-policy reforms that do not includechanges in land-management practices havevery limited impact on national income once theexistence of land-quality effects is considered.Goldin and Roland-Host (1994) present a casestudy in Morocco that establishes that trade



liberalization, combined with reformed waterprices, induces substantial reductions inagricultural water use and an increase in GDP.The evidence from these studies leads Malerand Munasinghe (1996) to conclude that thefirst-best remedy is to eliminate the subsidiaryimperfections such as policy and marketfailures, without changing macroeconomicpolicies. This conclusion should be treated withcaution because the case studies focus on onlya couple of market imperfections, whereas areal economy produces many obstacles to thesuccess of the SAP with respect to theenvironment. For instance, the infeasibility ofdealing with social and environmentalrepercussions of SA in subsequent programs isdiscussed in Reed (1996) (see Appendix C for acase study for Cameroon).

2.1.5 Four-Dimensional Analysis

Cromwell and Winpenny (1993) propose asimple structured approach to analyzing theenvironmental effects of economic reformfocusing on four dimensions: spatial coverage,scale of production, product mix, andproduction techniques. The method allowsextensive analysis that incorporates data,anecdotal evidence, and structural limitationsto provide an overall picture. The studyconcludes that economic reforms appear tohave had an initial negative impact on theenvironment in Malawi, particularly on thecrop mix and intensity of production. This isattributed to the already relatively fragileenvironmental base and underlying structuralfactors, such as the inability to change theproduction technique. The study criticizes the“insensitivity of adjustment loan prescriptionsto local conditions.” The authors qualify theirconclusions as tentative due to unreliable datain some areas and the absence of data in otherareas, primarily for certain economic indicatorssuch as migration patterns and changes inagricultural price and input-output ratios.

2.1.6 Accounting for Chaotic Effects

Mearns (1991) does not propose a specificframework for analysis but challenges thestandard model of SA-environment linkageson five major counts. The first challenges “thepretensions” that neoclassical economics is apredictive science. Three further challengesrefer to the omission or relegation of thefollowing concepts relevant to a fullunderstanding of economic system-environment interactions: historicism(irreversible time and evolutionary change),scale limits, and, finally, access to ordistribution of resources. The fifth challengeconcerns the inadequate way thatenvironmental change is conceptualizedwithin the model (with respect to uncertainty,chaos, and nonlinearity), which allows randomincidental effects to produce significantenvironmental changes.

The author concludes that SA-environmentlinkages require multiple and comprehensiveanalyses accompanied by extensive discussionbetween experts and the individuals affected.Without detailed information on constraintswithin a particular livelihood system,explanatory models are unable to anticipatethe likely environmental consequences ofpolicy reforms.

Logic and reference to noneconomist studiessupport the argument. An example fromMalawi highlights the point that a femalesmall-holder, who has the majority of incomeoriginating from nonfarm activities, will notinvest effort into soil conservation if fertilizeressential for self-provisioning food is tooexpensive. “Only by acknowledging the multi-faceted problem can a possible solution such asproviding environmentally benign off-farmemployment be achieved” (Mearns 1991).


General Approaches

2.1.7 Computable General Equilibrium (CGE)Models

CGE models are a system of equationsdescribing the economic relations in amacroeconomy. These models assumeunderlying values for the parameters in theequations, and macroeconomic policy shocksare then incorporated. The models simulate howthese shocks affect different aspects of theeconomy.

In this paper we review several studies that useCGE to analyze the effects of SAP reforms. CGEhas been used to model the introduction ofproperty rights (Persson and Munasinghe 1996;Munasinghe and Cruz 1994) and themodification of the functioning of markets(Persson and Munasinghe 1996). Environmentaloutcomes after the SA reform can be monitoredby using several environmental indicators,such as those found in Abler, Rodriguez, andShortle (1999). In Wiig et al. (2001), resultingenvironmental impacts are fed back into the

economic model. Social changes, such asmigration, have also been studied by CGE. Forexample, Glomsrød, Monge, and Vennemo(1999) study its effects on deforestation. A goodexample of modeling uncertainty is available inAbler, Rodriquez, and Shortle (1999). In a casestudy for Pakistan, Reed (1996) addresses someof the shortcomings of CGE, such as its inabilityto model dynamic and distributionalimplications (see Appendix C). The model usesa tax-policy simulation and a long-run growthmodel to incorporate dynamic issues, and thedistributional effect is reflected in anenvironmental Kuznetz curve (World Bank,1992). Overall however, the CGE methodologyis limited because of time constraints, and it isonly applicable to countries that have the rightkind of data available. CGE is highly data- andparameter-dependent, and attention should bepaid to appropriate sensitivity analysis toaccount for the uncertainty of the underlyingmodel parameters.


Sectoral Analyses3The following section reviews the evidence inthe literature of the impacts of SA on theenvironment by sector. Annex 1 presents asummary table of these theoretical linkages,their effects on the environment, and the studiesthat analyze them. Although the sectoralapproach is a useful one for thinking aboutpotential impacts, partial evaluations may bemisleading. For example, Pandey and Wheeler(2001) show that SA has had strong impacts onindividual sectors, but the overall impact isneutral. This stresses the need for in-depth,wide-reaching studies.

3.1 Agriculture

This section summarizes key findings in theliterature for the agricultural sector. Theenvironmental impacts are primarily a result ofsubstitution effects in crop production, thechanging pressure on land due to the incomeeffects of the reforms, the restructuring of land-tenure rights, and credit availability.

3.1.1 Substitution Effects

Agricultural-policy reforms within SAPs usuallyencourage a shift from the production ofsubsistence crops toward cash crops. Richardson(1996) reports evidence of changes in the typesof crops cultivated under the SA period inKenya. According to Richardson, it is difficult toattribute these changes solely to the economicreforms. For example, switching effects that areconsistent with the direction promoted under

the reform process include the movement frommaize production toward high-value dairyfarming and horticultural crops (particularly inland-scarce areas).

The environmental impact of these changes ismixed. Greater regional specialization in maizeproduction is likely to be environmentallybenign but will also increase the vulnerability ofsmall farmers unless there is a significantimprovement in maize marketing. Movementstoward dairy farming and horticultural cropswere found to have had mixed environmentalimpacts depending on the underlyingtechnology and farm-management practices.The reform program failed to intensifyagriculture as originally planned. Constraintscreated on the use of chemical fertilizers andcredit have encouraged manure use andcomposting. In some areas, sustainableincreases in crop yields have been achieved byimproved land and water management, ratherthan through the adoption of “improvedinputs.” For example, in Machakos District,investment in soil and water conservation wasconsiderable, particularly in areas given over tohigh-value crops where tenure rights are secure.The area also benefited from considerableresearch, training, and extension and long-termdonor assistance in soil and water conservation.Richardson stresses that more information isneeded for a plausible prediction of the supplyof and environmental response to changingeconomic incentives at the macro level.



3.1.2 Income Effects

System-wide reforms under SA affect therewards to factors in different sectors andactivities in the economy. Cuts in governmentexpenditures and changes in its overallcomposition must also affect secondary incomes(for example, transfers) and entitlements. Theseand any other effects virtually guarantee thatincome and income distribution are affected bySA (Ferreira and Keely 2000).

Postigo (1996) argues that countries that haveundergone SA have experienced economicstagnation accompanied by increased sufferingon the part of the poorest of the population andalleges that this is the result of efforts to serviceexternal debts. Assuming that poverty andenvironmental degradation are linked, Postigocontinues, it can be concluded that where SAPshave resulted in increased poverty, they have anegative impact on the environment. The papernotes, however, that previous governmentpolicies equally failed to solve the problem ofpoverty, and that the actual impact of SAPs onthe environment does not alter this situation.

A similar point regarding income effects ofSAPs is made by Mackenzie (1993). The authorstresses that the group responsible for themanagement of the natural resource base inagriculture experiences a negative income effectas a result of the SAP but is not targeted by theSAP instruments. Evidence links increasedstress on women farmers, who have significantresponsibility for the day to day management ofthe land, with a tendency toward unsustainableexploitation of the resource base. The studysuggests that the implementation of SA policiesfrequently increases the emerging contradictionbetween land-use management for agriculturalproduction to ensure survival and the long-termsustainability of the resource base. Mackenzie

states that where there is a difference in genderaccess, control of land, and livestock anddecisionmaking within the household, womenfrequently contribute to the production ofcommodities either without a wage or with aninadequate wage and to husbands whoappropriate the proceeds of their labor. In sucha situation, maximizing short-term economicgain through unsustainable mining of theresource base may outweigh the long-termconsequences of this unsustainable mining.There are many examples of this “reproductionsqueeze,” which emphasizes that SAPinstruments (usually subsidies and prices) donot reach the women who have theresponsibility for working in the field(Mackenzie 1993).

Some authors go further than that and questionnot whether SAPs improved income, butwhether higher incomes necessarily bring aboutmore sound agricultural practices. For example,Mukherjee (1995) argues that cultivators indeveloping countries, such as India, do notmodify their land-management practices andsystems easily because society (particularly inthe rural sector) is to a large extent influencedby customs, traditions, usage, and conventions.A change in the farming system and in the farm-management practices cannot come about inresponse to increases in the producer’s pricemargin. In addition, cultivators with veryprofitable crops that are extremely erosive willnot implement conservation measures unlesstheir returns are perceived to be affected by soilerosion almost immediately.

3.1.3 Land Prices and Tenure

The positive effects of the establishment oftenure rights have been well studied andconfirmed in the literature. Land-reformprograms, which provide secure tenure tofarmers, can have indirect benefits for the


Sectoral Analyses

environment. Where private landownership isclearly established, farmers are more likely togrow perennial crops and adopt intensive agro-forestry methods instead of traditional annualcrops and extensive cultivation practices(Southgate 1988; Southgate and Pearce 1988).Young and Bishop (1995) argue that this in turnfavors soil-conservation efforts since perennialcrops tend to be less erosive. A shift toperennials can also reduce demand for chemicalfertilizers, with potential health benefits(although the same is not necessarily true ofpesticide use, because many tree crops requireheavy application of pesticides). A more recentand quantitative paper by Persson andMunasinghe (1996) analyzes the importance oftenure to deforestation and soil erosion in CostaRica. The authors use a CGE model that differsfrom the standard approach of CGE modelingbecause it includes undefined property rightsand it modifies the markets for logs and clearedland.

Persson and Munasinghe develop threescenarios. They take the current situation ofundefined property rights as the base case. Inthe second case, property rights are defined andthe opportunity value of forests is set 28 percenthigher than the value derived fromdeforestation. The definition of property rightsresults in a dramatic decrease in deforestationand an increase in the net import of logs.Sensitivity analysis shows that even a relativelysmall opportunity value of forests decreasesdeforestation dramatically. Varying the interestrate while keeping the opportunity value fixedshows that high interest rates promotedeforestation and vice versa. In the thirdscenario, the effects of taxes on logs, land,unskilled labor, and capital are investigated.Resources shift to the agricultural sector, whichincreases deforestation. The increase indeforestation can be explained by the lower

price of unskilled labor resulting from thediscontinued production in the forest sector.

The authors note several data and modellimitations. Because of various dataadjustments, the results of the simulations aremainly indicative and not necessarily precise,quantitative measures. Second, because themodel they develop is essentially static, theresults are comparative snapshots of differentpolicy experiments. Third, the approach doesnot include all possible linkages withdeforestation. Migration and population growthare two causal factors that may be importantbut are not investigated. Furthermore, themodel neither allows for reforestation norincludes erosion and other external effects ofdeforestation.

Similarly, Lopez (1993) states that the common-property regimes may traditionally have beensufficient to ensure sustainable use ofagricultural lands through the management ofpopulation and through fallow periods, whichincrease the ability of land to regain its fertility.These traditional arrangements have beenoverwhelmed ultimately by economy-wideforces. The policy simulations in Lopez’s papershow that the primary force of changes in“supply response in agriculture, is that ofexpansion of land already cultivated rather thanthat of agricultural intensification. This resultsuggests that, in general, macro price and wagepolicy reforms that do not incorporate changesin land management practices have very limitedimpact on national income where land qualityeffects have been considered” (Maler andMunasinghe 1996, p. 118).

3.1.4 Agricultural Credit

The aim of financial market reforms is often toincrease the availability of credit to poorer,



small-scale farmers. One argument put forwardby Mink (1992) is that credit facilities canstimulate a shift toward perennial crops, whichoften results in less soil erosion but which smallfarmers traditionally avoid because of the crops’long maturation periods. More generally,improved access to credit will lead to increasedinvestment in farm improvements, greater useof modern inputs, and higher levels ofproductivity.

Mink also points out, on the other hand, thatincreased availability of credit may encouragethe expansion of cultivated areas, which allowsfor intensification through more use ofmachinery and industrialized inputs such asagrochemicals. These allow farmers to recovermore easily from declining natural soil fertility,reducing incentives for soil conservation in theshort term and contributing to the eventualexhaustion of land in the long run. A notoriouscase of environmental destruction linked to theavailability of agricultural credit is theexpansion of cattle ranching in Brazil during the1980s. Subsidized credit for large-scale ranchingis identified by several authors as one of themost significant causes of deforestation in theAmazon during that period.

Opschoor and Jongma (1996) state that theremoval of credit facilities and subsidizedinterest rates may affect environmental qualityif it leads to changes in the sectoral compositionthat are not environmentally neutral. However,monetary and interest reforms may alsocontribute negatively to environmental qualitywhen credits and subsidies benefitenvironmentally damaging activities. Anexample of the latter can be found in Costa Rica,where relatively cheap loans have made itpossible for large areas of land to be used forlarge-scale cattle farming on largely unsuitable

land (Foy and Daly 1989). The credits andsubsidized loans intended to supportenvironmentally beneficial activities had theopposite effect.

3.1.5 Full Effects of Structural Adjustment

Wiig et al. (2001) use a computable generalequilibrium (CGE) model to simulate the effectsof typical SA policies on the Tanzanian economyand environment. By incorporating a model ofthe nitrogen cycle into a CGE model, theyestablish a two-way link between theenvironment and the economy. For example, apolicy change such as a reduction in fertilizersubsidies will lead to a reduction in soilnitrogen (economy on ecology), which is thesource of reduced production in the followingyears (ecology on economy).

A “business-as-usual” baseline scenario is used.The policy changes of the SAP are thenintroduced stepwise, one on top of the other,until the full package is reached. The policiesconsidered were the removal of subsidies,reduction in the export tax rate, devaluation,reduction in government expenditure, and cutsin foreign transfers. The model considers threeimportant environmental variables: natural soilproductivity, soil depth, and use of land.

The change in natural soil productivity differedbetween crops. The change compared with thebaseline scenario was small or zero for all cropswith the exception of coffee, cotton, and maize,which changed by 0.5 percent, –0.1 percent, and–0.6 percent, respectively. The removal ofsubsidies had a negative impact on soilproductivity in all cases. In the case of coffee,this was offset by the reduction in the implicitexport tax on cash crops and currencydevaluation. These policies resulted in the fullSAP having a positive effect on soil productivity


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for coffee. Currency devaluation had a negativeeffect for cotton and maize.

Soil depth was even less sensitive to thedifferent policy scenarios. The removal ofsubsidies causes a 0.5 percent reduction in soildepth for tobacco compared with the baselinescenario. There was no change for any otherpolicy or crop.

The third environmental impact that the modelconsidered was land use. Again, it was theremoval of subsidies on fertilizers that wassignificant. The total use of land increased by3.5 percent when subsidies were removed.

3.2. Forestry

The effects on deforestation trends have beenanalyzed primarily through the interaction withagricultural land expansion. Studies have alsolooked at the impacts of changes in agriculturaland timber prices, public sector reform, anddevaluation. Perhaps one of the most interestingresults is by Pandey and Wheeler (2001), whofind that each 10 percent devaluation incurrency induces a 2 percent increase in round-wood production.

Barbier and Beghin (2000) investigate theimpact of SAPs introduced in Ghana in 1983 onforests and biodiversity, directly through theproximate causes of agricultural land expansionand timber production and indirectly throughoutput and input prices for cocoa, maize, andtimber. A piecewise, linear estimationprocedure, which separated the influences ofthe preadjustment and postadjustment periods,was used to estimate a recursive model. Themodel included variables such as forest loss,cocoa land, maize land, and timber-productionequations as a function of input and outputprices developed from an optimal control

problem. A species index for Ghana was alsoestimated using a species-forest area relation.

The authors demonstrate that cocoa and maizepolicies undertaken under the SAP since 1983have reduced the impacts of cocoa landexpansion and, to a lesser extent, timberextraction on forest loss. Although little impactwas found on the timber and harvesting trends,the relative returns to timber production havean important impact on the rate of deforestationand biodiversity loss in Ghana. Morespecifically, higher agricultural and timberprices, even where subsidies on inputs areremoved, may have helped reduce demand forforested land and thus have aided biodiversityconservation.

Glomsrød, Monge, and Vennemo (1999)examine the migration decision of Nicaraguansquatters at the frontier between agriculturalland and forest reserves (See Munasinghe andCruz, 1994 for a description of a case study inPakistan which examines migration anddeforestation). The study uses a CGE model toanalyze the impacts of several policy options oneconomic growth and forest conservation. Theauthors investigate the impact of the SAP ondeforestation taking place where theagricultural frontier has advanced into forestreserves in Nicaragua. The opportunity cost ofmigrating to the frontier does not simplydepend on wage-income opportunity, but alsoon the market price of basic grain, whichdetermines the capacity to consume beyondsubsistence given a certain real wage. Theauthors find that reducing public expendituresboth conserves forests and enhances economicgrowth in the long run while showing positivedistributional effects. An increase in the salestax reduces economic growth, but as ruralincomes decline and people migrate to urban



areas, deforestation declines. Under anincreased flexible-wage regime, rapid economicgrowth does not ensure less pressure on forestreserves. The reason for this is that despite theconsiderably higher rate of growth of theeconomy, the rural wage level increasesinsignificantly and the higher food prices cancelout the potential benefit from improved and lessuncertain income opportunities within themarket economy. Subsistence farming isincreasingly attractive under the new priceregime, which means that its impact ondeforestation is still negative after 10 years. Theauthors conclude that under different policyscenarios, rapid economic growth does notensure forest conservation. Noticeably, there arepolicies that initially intensify deforestation butencourage forest conservation in the long run,such as reducing public expenditures.

Angelsen, Shitindi, and Aarrestad (1999)empirically analyze the linkages between inputand output prices, the connection betweenincome and changes in resource use, and theeffects of technological change on deforestationrates in Tanzania. They find that increases inagricultural productivity and output pricesincreased the conversion of forested areas toagricultural lands. To clarify the cause ofdeforestation, they consider two differentmodels of agricultural land expansion: thesubsistence (population) approach and themarket (open-economy or profit-maximizing)approach. The approaches make differentassumptions about household behavior and thelabor market, the latter being more mostimportant. In the subsistence approach no labormarket exists, whereas a perfect labor market isassumed in the market approach.

The subsistence approach seems to dominatethe thinking on the causes of, and remedies for,

deforestation within the development aidcommunity. A main policy recommendationaccording to this approach is population controland agricultural intensification; increasedproductivity will reduce the deforestationpressure. The market approach, on the otherhand, emphasizes the importance of alternativeemployment. It also highlights thecounterproductive effect on deforestation ofintensification programs that increase theprofitability of agriculture close to forests. Themajor result of Angelsen, Shitindi, andAarrestad’s regression analysis is that producerprices, in particular of annual crops, areimportant factors in encouraging the expansionof agriculture. A more complex Chayanovianmodel with subsistence requirements andimperfect labor and credit markets wouldprovide a more realistic description of farmhouseholds’ behavior and the constraints thatthey face. A significant conclusion from thisstudy is that increases in productivity and/oroutput prices in Tanzanian agriculture willlikely lead to more forested areas beingconverted to agricultural land. Recent economicliberalization has increased agricultural-outputprices, to which Tanzanian farmers haveresponded by increasing agricultural area andproduction. The authors warn that results of thestudy should be interpreted with great cautiondue to data-quality issues.

Pandey and Wheeler (2001) combine a completerecord of World Bank SA operations with a 38-year socioeconomic database for 112 developingcountries to analyze the impact of SA ondeforestation. Using round wood as a proxy fordeforestation, they develop an econometricmodel of trade, production, and consumption ofwood products. The model looks at five sectorsof wood products (round wood, sawn wood,


Sectoral Analyses

panels, pulp, and paper), all of which aresignificantly, but differently, affected by SA.

The authors find that SA has not promoteddomestic deforestation because the impactsbalance each other out: wood-processingactivity falls, round-wood exports decline, andround-wood imports increase. While the overallround-wood production remained nearlyconstant, the results suggest that SA inducedpowerful and durable changes within the forestsector. Sectoral activity shifts away fromindustrial inputs toward the production andconsumption of fuel wood. It is unclear whetherthis was accompanied by an increase in healthdamages from indoor air pollution.

The results suggest that income growth hasreduced the pressure on forests, whilepopulation growth and urbanization haveincreased it. For insights into the impact ofmacroeconomic policies, the authors estimatedround-wood-production equations thatincorporate the monetary, fiscal, and trade-policy variables. They find the only policy thathas a significant impact on deforestation isdevaluation. Each 10 percent devaluationinduces a 2 percent increase in round-woodproduction. Because major devaluations are notuncommon, the implied impact of devaluationcould be quite large. The analysis of macro-policy variables also finds that terms of tradehave a significant effect on forest resource use.

Although Pandey and Wheeler find that theimpact of SA on domestic deforestation isneutral, the study shows a displacement ofdomestic deforestation to other countries, whichmay be a policy concern. The displacementimpact of SA is mildly negative for three of thewood-processing sectors (sawn wood, panels,and pulp) but large and positive for paper andeven larger for round wood. The overall impact

on overseas deforestation depends on relativevolumes of activity in the five sectors.

3.3 Water Sector

The potential impacts of SAPs include changesin the level of water use and water pollution.There appear to be few studies on the impactsof SAPs on water pollution. This may largely bebecause the data that can provide direct insightsinto the impact of SA on water pollution aresparse. Most water pollution is highly localizedand is often linked to discharges of humanwaste rather than to industrial or othereconomic activities. The pattern of change iscomplex and often hard to interpret.Arrangements for municipal financing andinfrastructure—which affect investments in, andthe operation of, sewerage and wastewater-treatment works—are at least as important aseconomic restructuring.

Hughes and Lovei (1999) consider the impact ofeconomic reform (general reforms, not onlyunder SA) in the countries of Central andEastern Europe (CEE) and the newlyindustrialized states (NIS). They compare twogroups of countries: those that underwent fastreform (mostly the CEE countries) and theslower reformers. For water pollution, due tothe lack of direct evidence, indirect indicatorswere used. They report that the use of fertilizersand pesticides fell by much more than cropproduction in both groups of countries. Thisshould have reduced runoff. While this may nottranslate into immediate improvements in waterquality, people who rely on shallowgroundwater sources for their drinking watershould benefit from these changes. Similarly, thedecline in the number of livestock should havereduced the runoff of nutrients, which areimportant sources of water pollution in theBaltic countries in particular.



The decline in water use in the industrial sectorwas 5 percent per year less than the decline inindustrial production while in the fast-reforming countries, it was about 5 percentgreater. Effluent changes in the slow-reformingcountries have decreased at about the same rateas industrial production has. This fact reinforcesthe conclusion that economic reform had littleor no effect on the overall environmentalperformance. However, due to the multiplicityof problems associated with economic reform,stronger conclusions cannot be formed.

The impacts on water use by the specific SALinstruments of trade liberalization and efficientpricing of water have been studied for Moroccoby Munasinghe and Cruz (1994) (see Annex 3)and by Goldin and Roland-Host (1994). Bothanalyses show that the level of water usedeclines and point to the positive effect ofremoving both price and policy distortions.

3.4 Wildlife-based Sector

SAPs affect the wildlife-based sector (forexample, wildlife tourism) through public sectorreform, exchange-rate adjustments, andinstitutional reforms. These impacts tend to beindirect.

A study in Kenya finds that the wildlife sectorhas been indirectly affected through theexchange-rate and public-expenditure cutbacks(Richardson 1996). The author analyzes reformssupported by the World Bank that were notincluded in the SAL/SECAL program of theBank but are regarded as “adjustment type”support because of their conditional nature andemphasis on the generation of foreign exchangeand the need for institutional and pricingreforms. Over the period 1980–1989, theexchange-rate reforms increased the demand forwildlife services, but at the same time, thecapacity of the sector to manage the wildlife

resource effectively was seriously eroded by thepattern of public-expenditure cutbacks. Thesector has now been targeted for institutionaland management reforms, and substantialinvestments are being made in physical andhuman capital. The paper notes that theemerging short-term evidence suggests thatthere has been substantial improvement inwildlife management.

Munasinghe and Cruz’s (1994) study ofZimbabwe finds that wildlife-based activities(unlike cattle ranching which competes forlimited land resources) are better suited to thecountries semi-arid climate and poor soils (formore details see Annex 3). The wildlife-basedactivities replace cattle ranching under the newpolicies of openness. Considering the carryingcapacity of the arid soil and the vested interestpeople have in preserving the environment forwildlife-based activities, the authors concludethat a shift to the wildlife sector actually helpsimprove the ecological balance in the country.The study does not, however, discuss thepossible negative effects of further expansion ofthe wildlife-based sector, such as large-scaletourism practices.

3.5 Energy

Environmental impacts are affected not just byimpacts on total energy use, but also by changesin the composition of energy use. These can bepositive or negative. For example, theintroduction of electricity tariffs can increaseenergy efficiency but may also induce anincrease in the use of traditional fuels, whichincrease air pollution. Price reforms andprivatization were the two policies that havebeen considered in the literature.

Meier, Munasinghe, and Siyambalapitiya (1996)consider two aspects of energy policy and


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environment linkages: the environmentalconsequences of an energy sector pricing reformand the effect of an environmental constraint onsectoral policy. Using the example of electricity-pricing reform and the commitment to reducegreenhouse gas (GHG) emissions in Sri Lanka.

To examine the impacts of alternativeelectricity-pricing policies, the authors designthree pricing scenarios, including a “business asusual”one. The model finds robust results,indicating that setting electricity prices to reflectthe long-run marginal cost (LRMC) has anunambiguously beneficial impact on theenvironment, both in the country and globally.This holds for a range of uncertainties exploredin the sensitivity analysis.

The authors conclude that the emphasis given toefficiency pricing in both project loans and SAlending is justified not only on grounds ofeconomic efficiency, but also on grounds ofminimizing the environmental damage ofeconomic development.

Munasinghe and Cruz (1994) (see Annex 3)study Poland and Sri Lanka and conclude thatto control emissions, additional environmentalregulations are necessary beyond efficiency-improving price reforms.

Environmental impacts are affected not just bytotal energy use, but also by the composition ofenergy use. From an environmental perspective,a shift from coal to gas is beneficial because ofthe resulting reductions in emissions of airpollutants. Fuel switching has the highestimpact on ambient air quality compared of anypollution source. Hughes and Lovei (1999) findthat the consumption of solid fuel in transitionaleconomies fell by more than the total energyconsumption did, but this fall was largest in the

slower reformers of the former Soviet Union.Price adjustments and convenience both suggestthat the share of coal in final consumption islikely to continue to fall. Another aspect ofenergy transition is that the use of petroleumproducts for transport fell by significantly lessthan GDP in both groups of countries. Therewas a strong growth in vehicle fleets. In faster-reform countries, many of the new passengercars have been more modern vehicles withlower emission levels.

From an environmental health perspective, themost damaging pollutants are those from smallsources, such as coal stoves and boilers.Adjustment reforms can have both positive andnegative effects on health. Lampietti et al. (2001)assess the impacts of the introduction of anelectricity tariff as part of an economic-reformprogram in Armenia. For sampled households,electricity-consumption records dropped, onaverage, 17 percent, and reported consumptionof substitutes, such as wood and gas, increased.This may be particularly apparent amongpoorer sectors of the society. While theinefficient practice of heating with electricitywas reduced, potential environmental problemsassociated with wood consumption, such asdeforestation and indoor air pollution,increased. Hughes and Lovei (1999) provide anexample of a positive impact of SA reforms.Using indirect measures, they find a strongdownward trend in the use of coal by smallsources (such as stoves and boilers) for bothfast-reforming and slow-reforming transitionalcountries. The relationship between the prices ofcoal and substitute fuels, especially gas, inEastern Europe is found to be more favorable tocoal than it would be if these prices fullyreflected world prices. As these pricingdistortions are gradually corrected duringreform efforts such as SAPs, it is likely that the



40

50

60

70

80

90

1990 1995

Advanced reformers

Slower reformers

Excess energy consumption by country group(1990 and 1995)

Perc

enta

ge

share of coal (a dirtier fuel) will continue todecline as its price reflects the world marketprice and increases.

3.6 Urban Environment

The main concerns for the effects of SAP on theurban environment are the possibility that theadvocated reduction in public expenditure willcause insufficient urban services (such as waterpurification and waste hauling), increasedurban pollution, and the uncontrolled flood ofmigrants from the rural areas. Riddell (1997)argues that countries have suffered fromreduced formal employment, declines inservices, reduced education facilities, mounting

inequality, brain drain, and a general decline inliving standards. A decrease in employment inthe formal sector encourages people to moveinto the informal sector, which is beyond thescope of government policies (particularlytaxation and regulation). Riddell concludes thatin general, SAPs impoverished human life inAfrican cities by increasing the cost of living,reducing wages, reducing social services andhousing, and decreasing employment facilities.

Onursal and Gautam (1997) look at the effects ofSAP-related liberalization and air pollution inMexico. They say that due to the tradeliberalization, the number of new imported cars

Box 2The Energy Sector in Transitional Economies

Hughes and Lovei (1999) consider the impact of economic reform in the countries of Central and EasternEurope (CEE) and the newly industrialized states (NIS). They compare two groups of countries: those thatunderwent fast (or advanced) reform (mostly the CEE countries) and the slower reformers. It was hoped thateconomic reform and restructuring associated with transition would eliminate the perverse incentives thatunderlie 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 mostadvanced 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 theeconomy declined. By contrast, most slower reformers have hesitated to embark on reforms or have failed tofollow through on initial commitments. As a result, in the slower-reforming countries, energy consumptionremained nearly as “excessive” in 1995 as it was at the beginning of transition (see Chart 1).

Source: Hughes and Lovei 1999.

Chart 1. Excess energy consumption


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has increased considerably. It is unclear whetherthis has had a detrimental effect on air-pollutionlevels. While an increase in the number of carswould increase pollution, replacing the vehiclefleet with newer, more efficient vehicles wouldoffset this increase. As most air-pollution timeseries start in the 1990s, it is difficult to assessconclusively the effect of SAPs. Some data, infact, show slightly declining (or constant)pollution. Data quality is simply insufficient todraw broader conclusions.

SALs, as argued in the El Salvador countrystudy by Reed (1996) (see Annex 3), have biasedthe economy to grow in areas such ascommerce, industry, and services in general,which are highly concentrated in metropolitanareas and their surroundings. Developmentactivity in metropolitan areas, as well asmigration from rural areas, has seriouslyaffected the urban environment in several ways.It has led to increased volumes of untreateddomestic and urban waste. In addition,deforestation has increased due to growth inhousing projects and fuel-wood harvesting. Aircontamination and lack of potable water are themost acute problems.

3.7 Public Sector Reform

Environmental protection is the responsibility ofgovernments in most countries. Cutbacks inpublic spending under SA can adversely affectthe level and quality of services, such as wastemanagement and sanitation, and of theregulation and enforcement of pollutionstandards, protected areas, etc. Environmentalquality may therefore decline even when theeconomy is growing.

On the other hand, lack of funds may reducepublic investment in projects with adverseenvironmental impacts, such as road and dam

construction or settlement projects in frontierareas. Evidence from the Brazilian Amazonsupports the notion that public spending ontransport and other infrastructure is closelylinked to the settlement of frontier regions andthus the rate of deforestation and landdegradation (Binswanger 1989; Mahar 1988;Reis and Guzmán 1992). Conversely, it may beargued that continued lack of publicinfrastructure and access to external inputs andmarkets obliges producers to maintainunproductive and environmentally destructivepractices, such as slash-and-burn cultivation ofannual food crops. Ozório de Almeida andCampari (1993) examine this hypothesis in astudy of the link between agriculturalexpansion and deforestation in the BrazilianAmazon.

With respect to public sector expenditures andrevenues, Richardson (1996) concludes that inthe environment-related sectors in Kenya, noefficiency gains have been achieved. Over theSA period, the decline in real expenditures, theerosion of civil service salaries, and the increasein corruption and theft have had a detrimentalimpact on the effectiveness of the publicservices, including the environment-relatedsectors. Although development expenditureshave tended to keep pace with inflation, therehas been a disturbing trend in the relationshipbetween external funding and the governmentcontribution to development projects. Over theSA period, there has been a pronounced growthin the dependence on external sources forfunding environment-related developmentprojects. Development priorities have beendetermined more by the availability of financefrom donors than by the economic, social, andenvironmental viability of projects.

Postigo (1996) also argues that institutionalpolicies that decrease public expenditure



usually lead to a significant weakening of thestate. Budget cuts may reduce the capability ofthe state to enforce controls and regulations thatare important instruments of environmentalpolicy. Reed (1996a) confirms this point (seecase study for Jamaica in Annex 3). It is certainthat in some instances, the state has animportant role to play in the protection ofenvironmental resources. However, throughpublic sector reform, the state may redefine itsrole, allowing it to better perform its corefunctions. This idea is analyzed in theGovernance subsection below.

3.8 Governance

The World Bank has placed increasing emphasisin SALs for improving the transparency,accountability, and effectiveness in borrowers’environmental governance. Examples of this areexplicit environmental policy prescriptions(such as the creation and strengthening ofenvironmental institutions), adoption of policiesfor environmental protection, natural resourcesmanagement plans, investment in pollutionabatement, environmental impact assessments,or environmental taxation, standards, andregulations (World Bank 2001). In the late 1990s,an average 21 percent of SALs withenvironmental conditionalities addressedreforms in the environment governance sector(World Bank 2001). Improved environmentalmanagement, regulation, and enforcement areexpected to have a greater role in improvingenvironmental performance and mitigating theimpacts of growth than do changes in thestructure of the economy and price incentives.Due to the difficulty of empirically studyingsuch influences, the effects of governancestrengthening on environmental performanceare not well covered in the literature. Thequestions analyzed in the SA literature discuss,first, the importance of institutional

development and, second, the ability of SALs tobringing about changes in environmentalgovernance.

A few studies support the idea thatstrengthening institutions is a prerequisite forbringing about economic and environmentalbenefits. For instance, a case study by Lopez(1993) focuses on Ghana and concludes that ingeneral, price- and wage-policy reforms that donot include changes in land tenure have verylimited impact on national income, once theexistence of land-quality effects is considered.Similarly Munasinghe and Cruz (1994) show theimportance of property rights for the CostaRican forestry sector by using a CGE model (seeAppendix 3). These studies highlight theimportance of environmental institutions ininternalizing environmental externalities intothe economic structure, thus improvingenvironmental efficiency.

In Seymour and Dubash (2000), the intentionaluse of SA as an instrument to bring aboutchanges in forest policy is analyzed. The studyconcentrates on a few countries: Papua NewGuinea, Cameroon, Indonesia, and Kenya. Theauthors examine the empirical record of theWorld Bank’s attempts to apply SA to forest-policy reform and ask to what extent the Bankcan be an effective proponent of forest-policyreform through SALs.

They find that under the right conditions, theWorld Bank has been able to catalyze key forest-policy changes in the context of SA lending (inPapua New Guinea and Indonesia). There havealso been failures and omissions. In Indonesiaand Cameroon, government commitments havenot been transformed into meaningful changesin concession allocation and managementsystems. These case studies highlight theimportance of the conditions under which the


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integration of forest-policy reform objectivesinto SA lending can bring about policy change.Seymour and Dubash find that on the part ofthe borrower, those conditions includeconstituencies for reform within the borrowergovernment or civil society and opportunitiesfor meaningful policy changes that do notrequire extensive institutional reform toimplement. On the part of the donor, conditionsinclude strong and consistent commitment tothe reform agenda and engagement with keystakeholders to define and communicate theobjectives and strategy for reform.

While confirming that forest-policy reformultimately depends on domestic politicalvariables, the case studies indicate that there areopportunities for donors to cultivate coalitionsfor change. Where domestic commitment islacking, donors can influence variables withintheir control to cultivate change. Donors canachieve this by broadening the scope of thereform program objectives to includeenvironmental quality, equity, governance, andreaching out to a larger group of stakeholders.

Box 3Good Practice of Institutional Development in World Bank Loans

The following two recent loans stand out as good examples of mainstreaming environmental governance inSA. Environmental concerns are mainstreamed in these loans, with clear linkages made between developmentoutcomes 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 permittourism 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-sectorprivatization to deal with environmental cleanup; and (5) reforms in the fishery sector, including the auctionof 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 SectorAdjustment Loan II. The loan (1) prescribes amendments to the Privatization Law to clarify the liability of thestate for environmental damages resulting from past actions; (2) establishes Environmental Impact Assess-ment requirements and risk assessment methodologies for privatization; and (3) requires remediation plansand execution agreements as part of the privatization process. Privatized establishments become subject toBulgarian 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 naturalresources and has further potential to benefit from its environmental assets. Bulgaria faces a large amount ofpolluting waste products capable of damaging human health and other assets. In both cases there are cleareconomic benefits to dealing with environmental issues. Bulgaria stands to lose substantial sums if investorsbid down prices for state assets as a result of concerns over the risk of environmental liability, and Madagascarrisks, without better management, the collapse of a fishery that is a significant foreign-exchange earner.


Effects Through Indebtednessand Economic Liberalization4

4.1 Debt and the Environment

An early focus of studies of the environmentalconsequences of SA reforms was the specific roleof external debt in natural resource depletionand environmental degradation. Some authorshave argued that developing countries wereforced to increase environmentally harmful,export-related activities in order to service theirexternal debts. This claim was most frequentlymade in reference to tropical deforestation.Attempts to test this hypothesis includeelaborate econometric analyses of the proximatecauses of deforestation (see Burgess (1992) for areview). However, the results of this research arecontradictory.

For example, Capistrano (1990) and Capistranoand Kiker (1990) test the significance of debt-service payments as an explanatory variable fordeforestation (measured in terms of industrialround-wood removal from broadleaved forests).Covering 45 developing countries between theyears 1967 and 1985, the model also includes arange of other variables relating to the forestrysector, agriculture, and the economy as a whole.The debt-service ratio was found to be asignificant explanatory variable for the years1972–75 only and had a negative coefficient.This counterintuitive result may reflect thereadiness of international capital markets tooffer credit during the early 1970s, which couldhave reduced pressures to sell off timberresources. A positive and significant relationship

was also found between devaluation anddeforestation for the period 1976–85.

Using industrial logging as a gauge ofdeforestation can, of course, produce misleadingresults for countries where logging is not asignificant cause of deforestation or wheretimber is derived mainly from plantation forests(Burgess 1992). A slightly different approach isadopted by Kahn and McDonald (1992, 1994).In this case, high levels of debt are thought toprovoke countries to behave in a myopicfashion, resulting in higher levels ofdeforestation than would occur otherwise (Kahnand McDonald 1994). Economic variables aregrouped into factors that contribute to GDP(labor, land) and alternative “unproductive”activities including government spending, debtservice, and investment (despite the cleararguments that these are indeed oftenproductive). Population is incorporated throughthe definition of a minimum consumptionstandard.

The main conclusions of the analysis are thatvariables that contribute to GDP should reducedeforestation, while variables that compete forthe use of GDP should increase deforestation.Debt is included in the latter group. The authorsfind a strong positive correlation betweendeforestation and public sector external debt,especially for the period 1981–85.

However, Young and Bishop (1995) criticize thisapproach for its arbitrary definitions of



productive and unproductive activities. Forexample, public health and educationareconsidered unproductive activities despitetheir evident contribution to growth in GDP.Young and Bishop also criticize Kahn andMcDonald’s interpretation of the results. Theresults indicate that debt and deforestation arecorrelated over the period 1981-1985, but thisdoes not mena that there is necessarily a causalrelation between them. In effect, it is possiblethat deforestation and indebtedness were bothaffected by the same set of circumstances,including influences from public policy.

4.2 Liberalization and the Environment

SA reforms typically favor export industries andtradable-goods sectors. Since many developingcountries have a comparative advantage inresource-intensive activities, critics havesuggested that SA programs stimulateoverexploitation of these resources, resulting intheir rapid depletion and environmentaldegradation.

Runge (1993) gives five separate effects of tradegrowth on the environment, namely the effectson (1) allocative efficiency, (2) scale of economicactivity, (3) output composition, (4) technology,and (5) environmental policy. Heerink,Kuyvenhoven, and Qu (1996) note that explicitaccounting for changes in transport flows thatresult from trade growth is also needed. Theyalso suggest analyzing the effects of changes inthe prevailing structure of trade impediments.The two most relevant features are theantiprocessed product tendencies of tariffs inindustrial countries and the high barriersagainst labor-intensive imports from poorcountries.

The main themes examined in the literature are(1) cross-country analysis of the pollution haven

hypothesis, (2) estimation of the effects ofchanged scale and structure of the economicactivity using CGE models, and (3) sectoralanalysis of the impacts on agriculture. The firsttwo are presented below, and the analysis ofagriculture in relation to liberalization ispresented in Appendix B.

4.2.1 Pollution Haven Hypothesis

The hypothesis states that “dirty” industriesmigrate to low-income countries after tradeliberalization because of differences in costs ofpollution abatement and looser environmentalstandards. Beghin (2000) provides an excellentsurvey of literature on this topic, from which theextract below was taken.

“The available evidence of specialization indirty activities by developing economies isinconclusive. There is convincing evidence thatunder an import substitution strategy, countrieshave specialized in pollution-intensivemanufacturing activities for which they are nottruly competitive. Outward orientation hasreduced the pollution intensity of output inseveral countries through a composition effect(Birdsall and Wheeler, 1992). There is alsoevidence of lower energy intensity broughtabout by a strong increase in the domestic priceof oil following trade liberalization (Vukina et al.1999).

Similar findings emerge for natural resourceuse. For example, a recent study has assessedthe impact of trade liberalization on agricultureand soil erosion in Sri Lanka (Bandara andCoxhead, 1999). This study finds that opennessincreases the demand for land in tea production,which is a relatively less erosive sector thanother crops, and thus has environmental as wellas economic benefits for the Sri Lankaneconomy. In the long run, an increased demand


Effects Through Indebtedness and Economic Liberalization

for land has a positive impact on the emergenceof land markets and reduces the uncertainty onthe returns to land conservation investment.However, some countries do show patterns ofspecialization in dirty activities following tradeliberalization: e.g., Indonesia (Lee and Roland-Holst 1997, Strutt and Anderson 1999), China(Dean 1999, Jha et al. 1999, Dessus et al.forthcoming), Costa Rica (Dessus and Bussolo1998, Abler et al. 1999), and Turkey (Jha et al.1999). These countries are expanding orspecializing in activities that are harmful to theenvironment. Both scale and, possibly,specialization induce environmentaldegradation. There is no definite evidence onwhich effect is dominant. Evidence reviewed byBeghin and Potier (1997) suggests that scaleeffects are most important. They find thatcountries face more domestic pollutionfollowing trade liberalization because theiraggregate activities have expanded, but notnecessarily because they are specializing indirty activities. However, new numericalevidence from a study by Ferrantino andLinkins (1999), suggests that specialization is amore important determinant of pollution thanscale. These authors provide estimates of theoutput effects of trade liberalization (theUruguay Round and a hypotheticalliberalization scenario in manufacturing) ontoxic emissions using a multi-country, appliedgeneral equilibrium model. Liberalizationslightly reduces global pollution byrationalizing formerly protected sectors, whichare pollution-intensive. Parts of Asia, as well asthe economies in transition may become morepolluted as a result of liberalization.

The specialization in dirty activities is not byitself evidence of externalities, but there isevidence that environmental protection in manycountries does not internalize the cost of

pollution appropriately (Pargal and Wheeler1996, Hartman et al. 1997). Furthermore,resource allocation tends to be more efficientunder free trade because world prices are oftencloser to social prices than the former distorteddomestic prices. The energy content ofaggregate manufacturing output tends todecrease with trade liberalization. Capital-intensive dirty production relocates fromdeveloping to developed economies, where it ismore resource-efficient and less polluting(Ferrantino and Linkins 1999). Vukina et al.(1999) find a result consistent with that ofFerrantino and Linkins in looking at the impactof market and institutional reforms on pollutionemissions and energy use in 12 former centrallyplanned economies. The energy use per unit ofaggregate product declines drastically withmarket reform, although the decline in energyuse may have been caused by the cleanercomposition of manufacturing output followingtrade and price liberalization.

The findings just discussed are consistent withthe earlier findings of Lucas et al. (1992).Outward-oriented economies have lowerpollution-intensity of aggregate output relativeto inward-oriented ones and have beenexhibiting declining pollution intensities withoutward-oriented growth in the 1980s.However, the robustness of the systematic linkbetween openness and declining pollutionintensities of output has been questioned byRock (1996). Measuring openness and marketintegration at the margin remains challenging inthe context of large panel data of countries andindustries” (Beghin, 2000).

4.2.2 Estimation of the Effects of Changed Scaleand Structure of the Economic Activity UsingCGE Models

An example of the approach used in this type ofanalysis can be found in Abler, Rodriguez, and



Shortle (1999). The authors’ objective is toexamine the environmental impacts of tradeliberalization in Costa Rica. They construct aCGE model of the Costa Rican economy thatincludes eight environmental indicators. Theindicators cover deforestation, pesticide usage,overfishing, hazardous wastes, greenhousegases, and urban air pollution.

This study is relatively unique in two respects.First, it explicitly recognizes and modelsuncertainty in the values of the economicparameters in the CGE model. Rather thanpicking one or a small number of “reasonable”parameter values, this study treats the economicparameters of the model as random variablesdrawn from prespecified distributions.Evaluation of each policy option takes the formof a Monte Carlo experiment in which a largenumber of random samples of the parametersare drawn, thereby generating an entiredistribution of results rather than a single set ofestimates.

Second, unlike most other studies of tradepolicy in developing countries, this studypermits technology to change in response totrade liberalization. These changes intechnology, in turn, lead to changes in economicactivity and the environmental indicators. Fordeveloping countries, the principal effects oftrade liberalization on technology are likely toarise through imports of machinery andequipment embodying new technologies.

Three trade-policy scenarios are investigatedhere. In the first one, ad Valorem rates for tariffsare limited to 5 percent. In the second, exportsubsidies are also limited to 5 percent, and inthe third, import tariffs, export taxes, and exportsubsidies are all limited to 5 percent. Theauthors caution that their results cannotnecessarily be extended to other countries. The

environmental impacts of trade liberalizationmight be greater in a country with greaterpreexisting trade distortions than those of CostaRica.

With this in mind, four major conclusionsemerge. First, the directions of environmentalimpacts of the trade-liberalization scenariosconsidered here are generally negative. In thethird scenario, which involves the greatestdegree of liberalization, five of the eightenvironmental indicators worsen in the casewhere technology is constant. In the case wheretechnology is variable, six of the eight indicatorsworsen. Second, even though the directions ofimpacts are generally negative, the magnitudesof impacts tend to be small relative to the base-period values of the environmental indicators,in the sense that most indicators change by lessthan 5 percent. The two exceptions arepesticides and organic wastes, where moderateincreases (between 5 and 10 percent) inenvironmental pressures occur in somescenarios. Third, the positive environmentalimpacts of the trade-policy changes consideredare also generally modest, in the sense thatindicators that improve at all do so by less than10 percent. Fourth, the results for the case wheretechnology is constant are not substantiallydifferent from the one where technology isallowed to vary in response to tradeliberalization. Nevertheless, the results differ inways that are relevant to environmental qualityin some cases. The most important differenceinvolves hazardous wastes, which declinemoderately given constant technology but littleor even increase when technology is variable.

Another study looking at scale and structureeffects concluded that for Indonesia, there arepositive structure effects but overwhelmingnegative scale effects (Munasinghe and Cruz1994) (for more detail see Appendix C).


Conclusion5The empirical research reviewed above doesnot resoundingly support or disprove theposition that SA adversely affects theenvironment. This highlights the difficulty ofgeneralizing about the environmental impactsresulting from SA, because the linkages areoften complex and case specific. Panayotouand Hupe (1996) find that most studies are“ultimately ambiguous as to the net positive ornegative environmental consequences” of SA.They also note that unambiguous statementsabout the impact of SA are usually based onspeculation rather than empirical evidence. Infact, studies often appear to be biased, lookingfor evidence purely on the negative or thepositive impacts of SA.

5.1. Difficulties in Studying theEnvironmental Effects of SA

The literature suggests that much of theinability to draw a conclusion can be attributedto modeling constraints. The case -specific anddynamic nature of the SA-environment link,combined with the fact that the use of SA hasbeen relatively recent, creates significantobstacles to modeling and empiricallyestimating the relationship. Some studies haveovercome these problems more successfullythan others. Listed below are the mainchallenges that the literature suggests a reliableand robust model should overcome.

• Absence of data. The problem of unsuitableor incomplete data is a serious one given

the complexity and scope of the problem.This is particularly significant for regionaland time-series data, given the relativelyshort period since SAPs were introduced.In some cases, qualitative data oranecdotal evidence were used tosupplement sparse quantitative data,which reduces the robustness of the modelresults.

• Focus on regional issues. As this review hasillustrated, the impacts resulting fromSAPs are very much dependent on regionalfactors. Qualitative evidence hashighlighted the varied impacts from apolicy even within a country. This is shownin the example of Tunisia, wherehomogenous subsidies were appliedthroughout the country. Opposite effectswere observed in different regions; in thenorth, the subsidies encouragedintensification, which reducedenvironmental pressure, whereas in thesouth, they led to severe environmentaldegradation (see Appendix C.1). For amodel to successfully predict theenvironmental impacts from a SAP,stresses Reed (1996a), it is important tounderstand the processes through whichSAL affect the environment, includingregional influences. This implies that anypolicy should be evaluated on a case-by-case basis and the results from othersituations should be transferred withcaution.



• Economy-wide studies are needed. Pandeyand Wheeler (2001) highlight that a studyof one sector can lead to misleadingconclusions. Their results show thatalthough SA may have a strong impact onindividual sectors, the overall impact isneutral.

• Distinguishing between “with” and“without” SA scenarios. The success orfailure of a SAP should not be determinedpurely by whether environmentaldegradation has improved or worsenedsince its introduction. There should be aclear definition of what would haveoccurred in the absence of reform andwhat impact the reform itself has had. TheStrategic Environmental Assessment modelused by Kessler and Van Dorp(1998) andReed (1996a) overcomes this problem bycomparing predicted trends inenvironmental degradation before thereform with post reform results.

• Dynamic social fabric. An added complexityto the study of predicted impacts of SAPson the environment is that the problem isdynamic. Reed (1996a) highlights that SAmay induce changes in the social andcultural fabric of the economy and thatthis must be included in the analysis. Malerand Munasinghe (1996) also note thatchanges in behavior from SAPs may affectenvironmental degradation. Reed statesthat where the distributional impacts of aprogram lead to an increased burden onthe poor, this could result in increasedenvironmental degradation. Even if theincidence of poverty increases only in theshort term, the impacts on theenvironment could be irreparable aspoverty-induced environmentaldegradation increases.

• Model deficiencies. Mearns (1991) suggeststhat the complexity and dynamism of the

problem challenge current economicunderstanding. He does not propose aspecific framework but questions thestandard model of SAP-environmentlinkages. The author concludes that toanticipate the likely environmentalconsequences of policy reforms, multipleand comprehensive analyses accompaniedby discussion with experts and the peopleaffected should be undertaken.

• Interaction with other programs. Hansen andHansen (1999) stress that the interactionamong the World Bank, other donors, andlocal government further complicates thestudy of impacts resulting from SAPs. Theystress that SA programs cannot be studiedin isolation. The study of a single SAP inisolation may suggest that the program hasbeen unfavorable to the environment, butinteractions with other complementaryprograms should be considered as onaggregate, they may have had a beneficialimpact on the environment.

The above complications with studyingadjustment-environment linkages explain whya resounding conclusion on their universalimpact has not been reached. These are the keyconstraints to mainstreaming the environmentin SA lending.

5.2. Lessons on How to Reduce NegativeEnvironmental Impacts

The literature suggests certain lessons that mayreduce the risk that SA will adversely affect theenvironment. Where direct environmentalimpacts exceed an acceptable threshold orindirect impacts via well-documented pathsare deemed excessive, the following issues maybe considered:• According to the studies, the trends and

causality of environmental use should beidentified along with the expected impacts


Conclusion

on the environment following the SA. Itshould be noted that current trends ofenvironmental use may change during theprogram.

• The characteristics of an economy shouldbe taken into account when the SAP isbeing designed, according to Reed (1996)and Kessler and Van Dorp (1998), amongothers. For example, Kessler and Van Dorp(with the SEA approach) find thateconomies that are highly resourcedependent are more likely to intensify theirexploitation of the natural resource base atleast in the short term. “Impacts arestrongly different for low and highexternal-input agricultural systems, fragileand robust ecosystems, upstream anddownstream situations, situations ofresource scarcity and abundance” (Kesslerand Van Dorp 1998, p. 278). Reed also findsthat the kind of economy undergoingreform is very important to itsenvironmental impacts. He finds that ingeneral, extractive economies tend toexpand and intensify the extraction ofnatural resources under SA. In agriculturaleconomies, the commercial and subsistencesectors react quite differently. SA hastended to result in commercial farmers’reducing pressure on the environment andsubsistence farmers’ increasing pressure. Arecurrent theme in the studies reviewed isthe strong influence that country specificand regional factors play in the outcome ofthe SAP.

• The literature suggests that the planningprocess may include detecting the need forremedial or additional policies to mitigateany adverse environmental effects orensure the realization of environmentalbenefits. Maler and Munasinghe (1996)achieve this using a CGE model. Reed

(1996) finds that for price reforms, whilethey hold the potential for positiveeconomic and environmental impacts,these may not be realized withoutadditional policies. Bojö (1997) analyzesWorld Bank studies, including Alicbusanand Sebastian (1989), and Warford et al.(1994) and concludes that the World Bank’sview is that SAPs that benefit the economybut have negative environmental effectsmay still be implemented, but mitigatingpolicies should be designed to reverse theadverse impacts on the environment.

• A key issue of concern to the World Bank iswhether to include environmentalconditions as part of the SAL or to designthem outside the program. Reed (1996)finds in the case study of Cameroon thatthe inefficacy of the SAP alienated somedonors, with the result that manycomplementary programs failed tomaterialize. Therefore, Reed recommendsthat any complementary programs beincluded in the original SAP. However, ifenvironmental impacts emerge sometimeafter the SA is implemented, thenincluding conditions within the SAL is notfeasible because monitoring is carried outfor only six months after initialization.Evidence of delayed environmentalimpacts is sparse. Pandey and Wheeler(2001) consider the impact of SA ondeforestation and its changing trend overtime. They find that the magnitude anddirection of the impact can change. Forexample, SA initially reduced sawn-woodimports in period one, but by the 12th year,sawn-wood imports increased. Thisdemonstrates that there are potentialissues with lags in adjustment, althoughtheir occurrence and magnitude are notequal across sectors. More studies will



need to be completed before a conclusion isdrawn.

• Equity issues may also be of concern. Someof the studies reviewed in this paperpurport that the impact of SAPs has had adisproportionate burden on the poor.According to Gilbert and Vines (2000), theerosion of natural resources may havestrong distributional impacts given thepoverty-environment linkages. Reed (1996)finds that the benefits from SA have oftentended to accrue to the better-off sectors ofsociety, while the costs sometimesassociated with the process have fallen onthose least able to absorb them. A potentialresponse of these more vulnerable groupsis to increase pressure on the environmentin order to survive.

• Some studies claim that the environmentalimpact will depend on how the SAPinfluences those groups of society whohave most control over natural resources,such as women and the poor. In theCameroon case study, Reed (1996)highlights that in order to understand theadjustment-environment links, a thoroughunderstanding of the role of women ascultivators, especially of food crops, and asgatherers of fuel wood is needed.

• It has been suggested that where a SAPoverlaps with other projects implementedby the World Bank, other donors, orgovernment, the cooperation betweenagents may greatly improve the efficiencyand outcome of a program. Closecoordination between donors andgovernment avoids duplication, conflictingadvice, and counterproductive efforts.Hansen and Hansen (1999) give anexample of a 1992 Environment andNatural Resources Sector Adjustment Loan(ENRSAL) that took explicit account of

other ongoing activities. An ongoing AsianDevelopment Bank (ADB) program loanfor fisheries and for a project for replantingmangroves dealt adequately with theseareas, so the ENRSAL excluded policymeasures for small-scale-capture fisheries.The interaction among programs, donors,and governments blurs the partial effectsof an individual program, making it harderto reach a conclusion on the program’ssuccess of failure. Complementaryinitiatives may follow in time, so it isimportant to consider the dynamic natureof interdependency.

Given these lessons from the literature, it maybe advantageous to consider the followingquestions when designing a SAL:• Which sectors will be most affected by the

SAP? Are these sectors highly resourcedependent?

• Will the current trends in environmentalresource use change due to SA? Are thesedue to changes in prices, the structure andscale of economic activity, income levelsand/or distribution, or environmentalmanagement?

• Will the impacts of SA fall disproportion-ately on certain segments of thepopulation? If so, will this result inincreased environmental degradation?Does SA affect those groups of society whohave the most control over naturalresources, that is, women or poor people?

• Can negative environmental impacts beoffset with additional policies? Canpotential environmental benefits berealized with the addition of policies orinstitutional strengthening?

• Does the SAP overlap with other policies?If so, will this interaction mitigate orexacerbate environmental degradation?


Conclusion

• Are there likely to be effects which onlyemerge sometime after the SA has beenimplemented? Can these effects beincorporated into the SAP, or shouldadditional programs be planned?

Many of these issues, which in some cases werepreviously overlooked, are now beingconsidered in the SA process. The initial SAPswere not directly concerned withenvironmental issues. Since then, theunderstanding of the development process hasimproved, and it is widely accepted that theenvironment is a vital component tosustainable development. An internal reviewof SALs in the Europe and Central Asia regionfound that that while there are importantenvironmental issues that should have beenaddressed in the SA projects, the rating of thisgroup of projects has generally beensatisfactory from an environmental viewpoint(Taylor, forthcoming). Hansen and Hansen(1999), focusing on SA in the Philippines,reviewed the body of literature on SAP-environment connections that was available atthe time the loans were prepared. They also

considered the relationship between the WorldBank and the Government of the Philippinesand determined that SAPs were “reasonablywell designed”. There is evidence supportingthe view that there has been a shift towardgreater emphasis on the environmental issuesin SAPs over time and more specifically since1987 (the year of the Brundtland report (WorldCommission on Environment andDevelopment, 1987), and establishment of theWorld Bank Environment Department).Hansen and Hansen find that whereenvironmental concerns have not beenexplicitly addressed within the SAPs, one willmost likely find complementary lendingoperations by the Bank or by other agencies.

In conclusion, the literature suggests that theSA impact on the environment is indirect,complex, and dynamic. The studies alsohighlight the many pathways by which theenvironment and SA may be linked, which inturn suggest a range of possible options formaximizing the positive impacts andminimizing the negative.


Appendix ATheoretical Linkages between Structural AdjustmentInstruments and Effects on the Environment

Environment D

epartment Papers

36

SA Instrument Policy Outcome Potential Environmental Impact Study

Country/

Region

Quanti-

tative

Agriculture

Devaluation

PriceLiberalization

InstitutionalReform

Change in cropprices

Donor assistancefor research,training, soil andwater conservation

� Increased cropspecialization

� Strengthenedinstitutional capacity

� Increased technologyadoption

(–) Soil erosion(–) Water contamination(+) Increased investment in soil andwater conservation(–) Increased vulnerability of poor tochange in world prices (–) poverty-induced environmental degradation(+) Conservation practices

Richardson (1996) Kenya No

InstitutionalReform

Establishment oftenure rights

� Increased incentives toinvest in perennialcrops andintensification

(+) Investment in soil conservation Young and Bishop(1995)Persson andMunasinghe (1996)

World

Costa -Rica

No

Yes

Financial MarketReform

Increase availabilityof credit to poor

� Increased investments.� Crop switching.� Expansion of cultivated

area.� Increased use of

environmentallyharmful activities

(+) Investment in intensification(+) More environmentally benigncrop choice(–) Deforestation(–) Environmentally harmful activities(for example, cattle ranching inforests)

Mink, (1992)

Opschoor and Jongma,(1996)

Brazil

Costa Rica

No

Yes

37Environm

ental Economics Series


Country/

Region

Quanti-

tative

CombinedReforms

� Change in crop mix� Change in use of inputs

(i.e. fertilizers)

(-) Reduced soil productivity(-) Reduced soil depth(-) Increased land use

Wiig et al, (2001) Tanzania Yes

CombinedReforms

Reduction inwomen’sincome

� Women are oftenresponsible for thenatural resource basein agriculture

(–) Short-term unsustainablemining of the resource base

Mackenzie (1993) África No

Forestry

Price Reform Change inagriculturalprices

� Change in relativereturns to timberproduction

� Interaction withagriculture

� Agricultural landexpansion

(+) Decreased agricultural landexpansion in Ghana(+) Small decrease in timberextraction in Ghana(–) Increase in agricultural landexpansion into forests in Tanzania

Barbier and Beghin(2000)

Angelsen, Shitindi, andAarrestad (1999)

Ghana

Tanzania

Yes

Yes

Price Reform Change intimber prices

� Affects loggingbehavior

(–) Reduction in direct logging butultimately increased deforestationdue to agriculture

Persson andMunasinghe, (1996)

Costa Rica Yes

Public SectorReform

Fiscal Reforms

Reduced publicexpenditure

Increase in salestax

Flexible wage

� Affects deforestationthrough urbanmigration

(+) Eases deforestation. Glomsrød, Monge, andVennemo (1999)

Nicaragua Yes

Devaluation � Increase in round-wood production

(–) Deforestation Pandey and Wheeler(2001)

Cross-country

Yes

CombinedReforms

� Opposite impacts onindividual sectors

(+/–) Net impact on round-woodproduction is negligible

Pandey and Wheeler(2001)

Cross-country

Yes

Environment D

epartment Papers

38


Country/

Region

Quanti-

tative

Water Sector

Trade Reform

Price Reform

Tradeliberalization andefficiency pricingof water

� Reduction inagricultural water use

(+) More sustainable use ofwater resources

Goldin and Roland-Host (1994)

Munasinghe and Cruz(1994)

Morocco Yes

Yes

CombinedReforms

� Reduction in the use offertilizers

(+) Decrease in runoffs andimprovement in the water qualityof shallow groundwater sources

Hughes and Lovei(1999)

Transitionaleconomies

Yes

CombinedReforms

� Reduction in water use (+) More sustainable use ofwater resources



Yes

Wildlife Based Sector

Public SectorReform

Reduce publicexpenditure

� Resources formanaging wildlife havedecreased

� Exchange rates haveaffected tourism

� Institutional reforms

(+) Initially negative but someshort-term evidence suggestssubstantial improvement inmanagement


Exchange Rate Increasedtourism

� Switching from cattleranching to wildlifeactivities

(+) Wildlife-based activities aremore environmentally benignthan large-scale agriculture

Munasinghe and Cruz(1994)

Zimbabwe No

InstitutionalReforms

� Investment in physicaland human capital


Energy

Pricing Reform

Privatization

Efficiency pricingof power

� Switch to electricityfrom dirty fuels

(+) Reduce air pollution Meier, Munisinghe, andSiyambalapitiya (1996)

Sri LankaWorld

Yes

39Environm

ental Economics Series

Privatization Institutionalchanges

� Increased energyefficiency

(+) Improved ambient air qualitydue to fuel switching

Hughes and Lovei,(1999)


No

Price Reforms Electricity tariffs

Remove coalsubsidies

� Increased incentivesfor use of wood- andcoal-fueled stoves

� Relative price of gasfalls, reducing demandfor coal

(–) Potentially harmful indoorpollution(+) Reduced health impacts fromindoor air pollution

Lampietti et al. (2001)


Armenia


No

No

Urban Environment

Public SectorReform

Reduction inpublicexpenditure

� Reduction in publicservices

(–) Untreated domestic andurban waste

Reed (1996) El Salvador No

Trade Reform Economicderegulation andopenness

� Increased migration tourban areas due toincreased economicopportunities

� Increased imports ofnew cars due toopenness

(–) Increased housing projectsrequiring timber products(–) Worsening of urban air qualitydue to increased population(+) Substitution away frompolluting, old cars

Riddell (1997)

Onursal and Gautam(1997)

Africa

Mexico

No

Yes

Public Sector Reform

Public SectorReform

Cutbacks inpublic spending

� Reduction of servicessuch as enforcement ofpollution standards

� Reduction in roadinfrastructure projects

(–) Reduction in public servicesresponsible for environmentalquality and health(+) Settlement of frontier areas(–) Isolation of region andoverreliance on natural resources

Postigo (1996)

Richardson (1996)

Ozório de Almeida andCampari (1993)

World

Kenya

Brazil

No

No

Yes

Governance Creation andstrengthening ofenvironmentalinstitutions

� Internalization ofenvironmentalexternalities

� Catalyze keyenvironmental policychanges

(+)Improvement ofenvironmental performance dueto correct economic incentives(+) Cultivate positive policychanges

Lopez, (1993)

Munasinghe and Cruz,(1994)

Seymour et al, (2000)

GhanaCosta RicaPapua NewGuinea,Cameroon,Indonesia,Kenya

Yes

Yes

No


Country/

Region

Quanti-

tative

Environment D

epartment Papers

40


Country/

Region

Quanti-

tative

Effect of Indebtedness

SA loans increasethe indebtednessof a country

Reforms toservice foreigndebt

� Pressure to serviceforeign debt leads tothe use of harmful,export-orientedactivities

(+/–) Contradictory evidence Burgess (1992)

Liberalization

Trade Reform � Migration of dirtyindustries to countrieswith lowerenvironmentalstandards

(–) Under import substitutionstrategy, specialization in dirtyindustries(+) Outward orientation hasreduced the pollution intensity ofoutput(+) Lower energy intensity

Beghin (2000) Yes

Trade Reform � Effect on technologyadoption throughimports

(–) Variable technology seems toworsen environmental indicators

Abler, Rodriguez, andShortle (1999)

Costa Rica Yes


Appendix BSectoral Analysis of the Impact of Liberalizationon Agriculture

Anderson (1992a, 1992b) uses a general leastsquares method to examine the effects of tradeliberalization on grains, meat, dairy productsand sugar. Results of a reference scenario for1990 are compared with results of aliberalization scenario in which all food-pricedistortions in industrial and developingeconomies have been removed and fulladjustment has been accomplished within thesame year. This is a partial-equilibrium model,implying that the focus is on efficiency gainswithin agriculture. The simulation resultsindicate that the total world food productionbarely changes as a result of trade liberalizationbut that the regional distribution of foodproduction changes considerably. There areproduction declines in Western Europe, Japan,North America, and East Asia and increases inChina, Latin America, and sub-Saharan Africa.With respect to specific effects on theenvironment, Anderson argues that there is anexponential relationship between the price offarm output and the use of farm chemicals perunit of output. Therefore, the relocation ofcropping production will substantially reducethe use of chemicals in poor countries. Inaddition, urban environmental pressures willreduce the flow of labor to urban areas.Deforestation might be affected, but Andersonargues that land area is, significantly, the leastresponsive factor to changes in farm outputprices, and even if deforestation does occur, thiswill need to be offset against reforestation onformer farmland in developed countries.

Lutz (1992), on the other hand, proves that indeveloping countries, the responsiveness ofproduction factors to agricultural price changesdepends on farm size. The responsiveness oflarge farms is very significant, while theresponse of small farms is comparatively smalland inelastic for all factors of production.Therefore, increased agricultural prices willresult in the more intensive use of resources andassociated negative environmental effects ofthat subsector in countries with a commercialfarm sector. Lutz concludes that higher worldagricultural prices would lead to economicbenefits for developing countries, but theassociated environmental effects are expected tobe negative. However, Lutz emphasizes thatbecause of the positive offsetting effects ofhigher income, empirical examination isnecessary to identify the impact unambiguously.

The criticism by Heerink, Kuyvenhoven, andQu (1996) is that these studies make nodistinction between environmental effects fordifferent groups of developing countries. Forexample, in sub-Saharan Africa, the current useof chemicals is low and is projected to remainunresponsive to higher output prices; however,the use of chemicals will be beneficial torestoring the nutrient balance in the countriesthere. Also, the reallocation of food productionmight lead to higher environmental damagebecause of the erosive potential of certain crops,and increased trade aggravates transport-



related environmental externalities such as theair transportation of kiwi fruits, eggs, andflowers.

Additional considerations to those of theauthors include, first, the possible changes inthe structure of agriculture in developingcountries, such as a shift to large, industrial-sizefarms, which will significantly alter the impactson the environment. Second, the evidence thatdeforestation is due to increased demand foragricultural land is mounting. In contradictionto Anderson’s (1992a) conclusion that land areais by far the least responsive factor to changes infarm output prices, more recent studies such asAngelsen, Shitindi, and Aarrestad’s (1999)suggest that the main reason for deforestation isthe expansion of agricultural land due to higheroutput prices. Finally, reforestation of formerfarmland in rich countries cannot be a surrogatefor deforestation in poor countries, where aforest is a source of energy, fuel wood, andmedicine.

Heerink, Kuyvenhoven, Qu (1996) furtherdiscuss the impacts of trade liberalization on

soil degradation in low-income countries. Themajor problems they identified are soil erosion,nutrient depletion, salinization, water logging,and compaction. The authors distinguish fourelements that will be affected by higher pricesafter liberalization: current versus futureproduction decision, farm practices,productivity versus conservation investments,and farmer private-discount rate. First, higheroutput prices may induce farmers to increasetheir production at the expense of soil quality orto cultivate marginal lands resulting in declinesin land productivity. Important determinants inthis case are input and output prices, privatediscount rates, and land-tenure arrangements.Second, with respect to farm practices, it is thedecision of the farmer whether to replenishtopsoil’s organic matter to prevent degradation.Third, higher incomes that result from priceincreases permit farmers to undertakeproductivity and conservation investments. Thelast significant point is that the farmer’s privatediscount rate is affected by the change in prices.The authors’ arguments are qualitative, so theresults are ambiguous.


Appendix CCountry Case Studies

C.1. World Bank Studies

The extensive casestudies in this bookhighlight five principleways that macro policiesinteract with theenvironment:• Removal of pricedistortions, promotion ofmarket incentives, and

relaxation of other constraints generallycontribute to both economic andenvironmental gains.

• Unintended adverse effects occur, however,when macro reforms are undertaken whileother neglected policy, market, orinstitutional imperfections persist.

• Measures aimed at restoringmacroeconomic stability will generally yieldenvironmental benefits, since instabilityundermines sustainable resource use.

• The stabilization process may haveunforeseen adverse short-term impacts onthe environment.

• Macro policies will have additional longer-term effects on the environment throughemployment and income-distributionchanges.

The authors reach their conclusions by givingspecific examples of effects from the countrystudies. Several research methods areemployed. In China, the authors focused on

sustainable agriculture during rapid anddramatic economic changes. They used farm-level data and surveys of farmers’ reactions tothe changes in strategic prices and policyvariables resulting from the economic changes.Farm models were designed using these data,which were then used to simulate reactions tofuture changes in prices and so on. Theenvironmental implications of these predictedreactions may then be accounted for. While thismodel is location specific and only applies toagriculture, it highlights the situation where thedesired market liberalization still merits somegovernment involvement to correct for marketfailures. The studies on Costa Rica and Moroccouse a computable general equilibrium (CGE)model to estimate the effects of introducingproperty rights on forest resources in the formerand the simultaneous introduction of trade andwater reforms in the latter.

Socioeconomic and land-mapping data arecombined to analyze the effects of ongoingtrade liberalization and public-employmentreduction on agricultural productivity and landuse in the Ghana’s western region. The authorsfound that agricultural-supply changes areassociated with expansion of cultivated arearather than with agricultural intensification.In Indonesia the authors investigated theimpacts of trade liberalization of theenvironment. They analyzed 14 years’ ofindustrial data up to 1989 and then projected

Munasinghe, M., and W.Cruz. 1994. EconomywidePolicies and the Environment:Emerging Lessons fromExperience. Washington, D.C.:World Bank.



Cruz, W., and R. Repetto.1992. The Environmental Effectsof Stabilization and StructuralAdjustment Programs: ThePhilippines Case. Washington,D.C.: World ResourceInstitute.

the likely impacts of continued reforms up to2020. The impacts of liberalization were studiedsector by sector. It turned out that the beneficialeffects on the environment from liberalizationwere twofold. First, liberalization promoted thestart-up of clean industries and second, itinduced a migration of dirty industry awayfrom heavily populated areas, thus reducing theoverall environmental burden. However, at thesame time, liberalization promoted industrialgrowth, which outweighed any positive effectsof the policy. Therefore, regulation is needed tocurb the resulting environmental burden.Mexico’s situation under trade liberalizationwas analyzed more qualitatively by looking atwhich sectors are promoted by free trade andwhich sectors grew due to country-specificforces. The authors conclude that industrialpollution has resulted from internal structuralchanges rather than liberalization.The Philippines study looked at how policies onagriculture affect forestry through population-migration processes. The government policy offavorably protecting corn crops, which is anupland, environmentally damaging crop, whilenot supporting rice production in the lowlands,induces a migration pattern that exacerbatesdeforestation. The authors find by econometricanalysis and multinomial discrete choiceframework that migration decisions are mostresponsive to lowland incomes.The analysis of the energy sector in Poland andSri Lanka uses a similar approach, focusing onprojections of energy generation andcorresponding emissions from three differentmodels, and concludes that additionalenvironmental regulations are necessary beyondefficiency-improving price control.The livestock sector in Tunisia is heavilysubsidized with the intention of increasing self-sufficiency and making livestock productsaffordable. The analysis of the subsidies showed

that the homogeneity of subsidies throughoutthe country was detrimental in some areasbecause it did not distinguish betweenbioclimatic zones. The effects of these subsidieshad very different impacts in different regions.In the north of the country, and to a lesser extentthe central regions, the subsidies encouragedintensification and integration with croppingactivities, whereas in the south, subsidies led tosevere degradation of range resources due toexcessive herding pressures.In Zimbabwe the authors found that wildlife-based activities were less environmentallydamaging than cattle ranching, which competesfor scarce resources. However, wildlife activitiesare perceived as underutilizing land, sotraditional pricing policies have supportedranching. Foreign-exchange policy played animportant role in this sector as the currency wasovervalued by between 50 and 80 percent in1981–90, which resulted in what was effectivelya tax on exports such as international tourismarising from wildlife-based activities. Whileeconomic liberalization has increased incomeand investment in the wildlife-based sector, itcannot be assumed that this has had a beneficialeffect on the environment because the studydoes not take into account the possible negativeeffects, of such as large-scale hunting or tourismindustries.

C.2. WRI and WWF Studies

Using a CGE model,Cruz and Repettoshow thatmacroeconomicpolicies withoutadequateenvironmentalcontrols haveincreased emissions,


Appendix C — Country Case Studies

pollution concentrations and congestion, andpressure on open-access resources and haveencouraged the overexploitation of depletableresources. The study focuses on two periods inthe Philippines: the 1960s and 1970s, which isconsidered to be the initial stages of the debtcrisis, and the 1980s, when stabilization andSAPs were implemented. “Adjustment reformsundertaken in the second period were furtherassessed and compared to alternative reformsusing a CGE model. Incorporating land as afactor of production, the model assessed thechanges in land use associated with alternativeSA policies. Thus the model was able tohighlight the effects of macroeconomic policychanges in resource-intensive sectors such aslogging, fishing, mining, upland agriculture andenergy supply” (Young and Bishop 19 95).

This World Wildlife Fund(WWF) study providespre- and postadjustmentanalyses of the IvoryCoast, Mexico, andThailand. The book’sformat is unusual: Localresearch teams

undertook most of the primary work, theirresults were interpreted and written by theLondon Environmental Economics Center; andthe overall conclusions were written by theeditor, a member of WWF. The quality of thecase studies is mixed, depending on theavailability of data and previous research by thecountry teams. Only in the Thai case were thedata extensive enough to support empiricalwork; the other two studies mainly offerplausible hypotheses.

The Thai report reaches the same conclusions asthe report by Cruz and Repetto (1992).Thailand’s preSA economy was less distorted

than that of the Philippines, but a highproportion of government subsidies wasallocated to pollution-intensive industries. Thesubsistence approach reduced an import-substituting bias and increased the efficiency ofmanufacturing, hence reducing pollution perunit of output. However, a number ofdistortionary policies remained, such as ahigher tax rate on organic than chemicalfertilizers, and serious market failures were notaddressed. These include open access toresources and insecure land tenure and creditrationing, which increases the difficulty forsmall farmers to acquire better technologies. Asa result, some environmental problems simplytook on new forms (overuse of someagrochemicals, rather than extension of theagricultural frontier, for example), while otherswere exacerbated.

The results of this study had a significantimpact on the adjustment-environment debate.They made an important contribution to theevidence for the direct linkages betweenmacroeconomic reforms and the environment.

This study aimed toextend the resultsfrom the first WWFstudy outlinedabove (Reed 1992)and overcome someof its limitations. First, it tried to deepen theunderstanding of the relationship betweenmacroeconomic reforms and environmenteffects in a wider range of developing countriesand strengthen the ability to predict theseimpacts. Second, whereas the first studyshowed that the indirect impacts on theenvironment through changes in the socialstructure are extremely important, the secondstudy tried to understand the impacts on the

Reed, D., ed. 1992. StructuralAdjustment and theEnvironment. Boulder, Colo.:Westview Press.

Reed, D., ed. 1996. StructuralAdjustment, the Environmentand Sustainable Development.London: Earthscan.



social structure and hence the environment. Italso studied the long-term impacts of theenvironment on sustainability anddevelopment. The nine country studiescoordinated by the WWF and executed by localeconomic research institutes with the support ofthe Overseas Development Institute (ODI) andHarvard Institute for InternationalDevelopment (HIID) applied a sectoralapproach, with case studies for certaineconomic sectors and future-economic-growthpatterns. The general method that was appliedcan be described as pragmatic and was based onthe reconstruction of basic relationshipsbetween economic development and theemergence of environmental problems over pastdecades. Changes during the SA phase relativeto historical trends were analyzed and probablecauses identified. Two main methodologicaldifficulties were identified. First, with theexception of Venezuela, each research instituteexperienced problems in obtaining consistentdata on the economy and the environment overan extended period. Second, there weredifficulties isolating the impacts of structuralreforms on the environment from those thatwould have occurred had those reforms notbeen implemented. Separating the “withreforms” from the “without reforms” scenarioswas further complicated because SAPs wereimplemented intermittently in several countries.The scarcity of reliable quantitative data limitedthe applicability of CGE modeling and hencewas used only for Venezuela, Vietnam, andPakistan.

Case Study for Cameroon

The approach followed in this study waseclectic. Researchers identified links between SAand the natural environment that seemedplausible on a priori grounds, based on theirknowledge of SA, environmental processes, and

local circumstances. These were qualitativelystudied and conclusions were reinforced byfield surveys and opinions of localprofessionals. The analysis, conducted from amacro perspective, was complemented by areview of the issues at the grassroots level infour different but important regions: the fertilefarming area of the North-West Province, thepopulous but semiarid Far North Province, thecocoa-producing area of the East Province, andthe forestry economy of the South Province.Data availability is patchy, impressionistic, andsometimes anecdotal. The study concluded thatSAP measures continued the bias of incentivestoward extensive rather than intensive farmcultivation. The more intensive use of existingland was penalized by the increased costs ofinputs, the shortage of credit, and the scalingdown of extension advisory services. This madefelling trees more profitable than activitiesrelated to other exports, whose selling priceswere reduced. The social repercussions of SAwere intended to be offset by various actions tobe undertaken by the World Bank and otherdonor agencies. In practice, the weakness andinefficacy of SA alienated some donors, andmany complementary programs failed tomaterialize. The study concludes that social andenvironmental programs that are intended tooffset SA measures should be contained withinthe initial design of the SAP and not left toseparate or subsequent programs. In addition,the authors (do you mean Reed (1996) instead?If not, which authors?)note that theinterpretation of the adjustment-environmentlinks requires an understanding of the crucialrole of women as cultivators, especially of foodcrops, and as gatherers of fuel wood.

Case Study for Mali

The approach undertaken was the same as thatfor the Cameroon study outlined above. The



main effects identified from SA lending on theenvironment are increases in both theextensification and intensification of agricultureand long-term decline in soil fertility fromintensive cotton monoculture.

Case Study for Tanzania

The research approach used in this study soughtto identify the conceptual relations betweenSAP and the environment while utilizinglimited data and other information sources.There is a lack of deforestation data, butanecdotal evidence suggests that deforestationincreases over time. Land clearing accounts forabout 40 percent of deforestation in area terms.SA encouraged expansion of output at the sametime as it increased fertilizer prices. The neteffect was that the expansion of agriculturalproduction through intensification was notviable for most small farmers. Soil erosion isanother major environmental problem. Since SAbegan in 1986, there has been a 17 percentincrease in the area planted to the nine majorfood and cash crops grown in Tanzania. UsingBarbier’s categorization of “erosive” and“nonerosive” crops, about 80 percent of thisincrease was in erosive crops: maize, sorghum,cassava, cotton, and tobacco (Barbier 1991). Theregression analysis shows that for maize, rice,sorghum, and cassava (that is, the food crops),the area cultivated increases as yields declineand vice versa for cotton and tobacco (that is,the cash crops).

Case Study for Zambia

The research approach in this study is the sameas that for Tanzania. The main environmentalproblem in Zambia is loss of wildlife, which hasaccelerated during the SAP period. The keycause of big game loss is from poaching fortrophies. The increase in urban unemploymentand in erosion of farm incomes resulting from

SA have clearly increased incentives for poorpeople to collaborate with the organizedpoaching gangs. The effects of SAP have beenmixed. The removal of restricted access toforeign exchange has resulted in positive effectson the environment, whereas negative effectshave occurred from the decreased funding forthe National Parks and Wildlife Service.Deforestation is another significantenvironmental problem, resulting primarily(over 90 percent) from land clearing foragriculture. The contribution of SAPs toaccelerated deforestation is difficult todistinguish. The cut in the public works budgetof the SA process may have contributed to theworsening urban water pollution.

Case Study for El Salvador

The World Bank assumed a leadership role inadvising and supervising the economic reformin El Salvador in 1991. The economy has beengrowing at fairly high rates under SA, and themost important contributors to that growth arecommerce, industry, and services in general,that is, economic activities that are highlyconcentrated in the metropolitan area and itssurroundings. Development activity in themetropolitan area and migration from ruralareas have led to acute problems in the urbanenvironment, including increased volumes ofuntreated domestic and urban waste,accelerated deforestation caused by the growthof housing projects and fuel-wood harvesting,decreased potable water provision, andincreased air contamination. In the ruralregions, poverty has been exacerbated andbecause rural survival strategies are a majorfactor in land degradation, this has led to higherlevels of erosion, sedimentation of major riversand dams, and the general loss in the capacityof the water resources.



The study does little to show the connectionbetween rural poverty and World Bank SAlending. Overall, an attempt to distinguishbetween the effects of SA lending on the onehand and country-specific developments andexternal shocks on the other is not made. Theanalysis focuses more on “before and after”than “with or without” the SAP. Only withrespect to institutional strengthening does thestudy concentrate on the link between SAPs andagriculture. The authors find that the mostserious negative impacts of SAPs are those oninstitutional capacity, because the agriculturalagencies responsible for the small and medium-size agricultural producers lack sensitivity tolocal conditions, have poor human resourcesmanagement, and extension services are poorlylocated.

Case Study for Jamaica

The only direct reference to the effects of theWorld Bank’s sponsored SA on the environmentis with respect to the government’s capacity todeliver efficient social services. Environmentalinstitutions were badly weakened by thereduction in public expenditures andredundancies in the public sector. The paperalso notes that SA has affected the government’scapacity to deliver efficient social services,among them waste management. Except for thispoint on institutions, the study only investigatesthe effect of the overall Jamaican developmentapproach, which did not explicitly incorporateenvironmental considerations. It makes no effortto distinguish the Bank’s role, whether politicalor economic, in influencing this approach in anyway. In conclusion, the case study does notprovide reliable results about SA lending andthe environment.

Case Study for Venezuela

The study is well supported by available dataand draws a convincing causal relationship

between SAPs and environment. The three mostimportant relevant elements are:• a reduction in public spending, which led to

a direct weakening of state institutions andprograms (particularly those of the Ministryof the Environment, MARNR) and hadindirect environmental impacts caused bythe considerable increase in poverty;

• encouragement of foreign investment,which permits the expansion of oil, mining,and tourist industries; and

• relaxation of controls, which allowsincreased deregulated exploitation.

With respect to institutional capacity, the authorpoints out that the SA process is influenced byreplacing the cooperative action betweenenvironmental nongovernmental organizations(NGOs) with a struggle to obtain the scarceresources that the state is making available. Thenational park system has been affected in twoways: directly by a reduction in the budget andindirectly as external factors put pressure on thepark system, resulting in a decline in effectiveresources per unit area of national parks.

The study explores future impacts by simulatingthree scenarios: (1) the “free market“ scenariofollowing the liberal market reforms introducedin 1989–93 under SA (free trade, crawling pegexchange rate, increasing public spending); (2)“exchange control” policies introduced underSAP in 1994, including exchange controls, priceregulation in some sectors, and stricter controlson public spending; and (3) as the secondscenario but with an additional policy thatwould redistribute income to the poor at theexpense of reducing profits. Each scenario isconsidered over the period 1994–2003 using thesimulation model of the Venezuelan economy,or the CENDES model. The results from themodel, which are macroeconomic variables such



as total income and exports, are disaggregatedinto production sectors using an input-outputmatrix. The sectoral outputs derived are thenfed into an equation that links economic andother indicators for each of the 38 subregions ofVenezuela to calculate a measure ofenvironmental quality. The impacts arecalculated on the assumption that no furtherenvironmental measures are introduced tomitigate environmental impacts. The mainresults from analysis of each of the scenariosare:• Wide variations in regional indices remain

in all the scenarios. However, the free-market scenario varies the most.

• Of the three, the scenario that is mostenvironmentally harmful is the free-marketscenario. This is followed by exchangecontrols and, finally, exchange control withdistribution.

• The causal chain in the model is mainlythrough a higher growth rate in general andthrough activities of the more aggressiveindustries (for example, mining and oil).

Case Study for Pakistan

Four related, in-depth studies were conductedto analyze the impacts of economic reforms onthe environment and society. The first is aimedat providing a rough long-run (50-year) pictureof the relationships among economic growth,population growth, and environmentaldegradation in both the presence and absence ofreforms, and it involved the construction of asimple, long-run economic growth model. Thesecond model complemented this analysis byproviding more detail on the impacts of specificreforms on individual sectors of the economy,although still in a macroeconomic context, usingthe CGE model. The third study addressesdistributional impacts, focusing on theregressivity or progressivity of the fiscal

elements of reform programs. It makes use ofthe Applied Economics Research Centre (AERC)tax policy simulation model. The fourth studyfocuses on agriculture. It analyzes the impactsof economic reforms on cropping patterns,groundwater balances, and salinity for irrigatedcrops in the Indus Valley, and it utilizes theIndus Basin model (revised) (IBMR), a linearprogramming model development by the WorldBank.

The first model finds that the reforms alonebring higher aggregate emissions comparedwith the business-as-usual scenario, but it alsofinds that there are larger numbers of peoplewith access to safe water and sanitation. Thesecond model is a CGE model. The CGE modelsacrifices the dynamic features of the growthmodel in return for rich detail on policyinstruments. The functional forms in the CGEare not estimated but are calibrated from thevalues of parameters in the Social AccountingMatrix of 1984–85. In contrast to the growthmodel, the impact of economic reforms on theenvironment are positive through increasedefficiency. The study considers that the CGEmodel is not dynamic and concludes that in theabsence of effective policy intervention, therapid economic growth triggered by reformswill intensify most forms of environmentaldegradation in the country in the short tomedium term. The tax-policy-simulation modelpredicts that fiscal reforms can loosen thecurrent fiscal constraints on social andenvironmental public-investment programs,which improve the quality of life of the poor.The agricultural model, IBMR, concludes thatprice reforms need to be in effect for 18agricultural commodities, water, and fertilizerto see any significant change. Under thisscenario, cropped areas in non-saline areas tendto increase. Reforms are likely to increase the



aggregate application of fertilizer because theeffects of increased cropping outweigh the shifttoward crops that are less fertilizer intensive.

The four analyses indicate that theenvironmental and social impacts of SAPs inPakistan are complex and not unidirectional.The CGE model predicts net environmentalbenefits due to the shift away from heavilyprotected and polluting industries, such astextiles and leather, and the stimulation of moreefficient energy use and other polluting inputs.However, individual reforms that do notaddress sectoral distortions can worsenenvironmental degradation.The other three analyses help address threeshortcomings of the CGE model: dynamics,distribution, and environmental feedbacks. Thethree main conclusions are as follows: (1) long-run growth brings environmental deteriorationas income levels are far below the turning pointof the Environmental Kuznetz curve, (2) , thedistributional implications of tax reforms aredetrimental to the poor; (3) the agriculturalsector increases its negative strain on theenvironment. Because of the differentmethodologies, it is not possible to reconcile theconclusions of these four approaches.

Case Study for Vietnam

The study uses a CGE model, capturing theimpact of environmental changes on theeconomy in a general equilibrium framework,taking into account the indirect effects indifferent sectors. Six different policy shocks aresimulated separately and analyzed in terms ofincome, employment, and environmental

effects. The first finds that liberalization ofcommodity trade may reduce theunemployment-related forest encroachment butwill not halt it, thus requiring complementaryreforms. The second scenario demonstrates thepoint that agricultural subsidies would not bean appropriate reform, neither in purelyeconomic nor in sustainable-developmentterms. The third simulation shows that moresecure property rights are a boon to both incomeand employment generation through increasedproductivity in land-based activities. Theauthors also conclude that clear property rightsare the most effective way to promote long-runhorizons to resource users and moreenvironmentally and economically sustainablepractices. The fourth scenario considered aredirection of some investment toward labor-intensive light industry and services away fromcapital-intensive heavy industry. This wouldhave created more jobs and have been lessharmful to the environment. Fifth, the authorslook at a reforestation program financed entirelyby a tax on logging and conclude that thiswould bring a net gain in real income andemployment. Last, the effects of an intersectoraltransfer of income are considered, again with anaim to remove externality-induced distortions.The model includes a 20 percent surcharge onenergy prices, with the proceeds used to financereforestation in watershed areas. An increase inreal income and jobs is observed. Consideringthat some of the policies are implementedsimultaneously or under already-existing policydistortions, the outcomes of simultaneoustesting might be reversed.


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