Economic Development and Environmental Protection in Latin America

By Joseph S. Tulchin | Go to book overview

2
The Role of the Multilateral
Lending Agency

Herman Daly

The World Bank has come under a great deal of criticism for its past environmental activities and even some of its present activities.It is important to keep us honest. I would like to suggest that the problem we are facing with balancing economic development and environmental protection is rooted in the university departments of economics where most of the people at the Bank were educated.

The fundamental starting point of economic analysis, if you look at any textbook, is a circular flow diagram. Circular flow of exchange value goes from firms to households and from households to firms, with no inlets or outlets, nothing coming in from the outside and nothing going to the outside. It has no possibility of ever interacting with the environment. We must move away from that basic vision and consider the economy not as an isolated system, but rather as an open subsystem of the total ecosystem that lives off the total system through an exchange of materials and energy. Until we take that interpretation as our preanalytic vision, we are going to have a difficult time dealing with environmental problems. They will always be brought in as afterthoughts and externalities treated on an ad hoc basis.

I recently gave a presentation in Canada on the question of sustainable development—the attempt to resolve the conflict between economic development and environmental protection. Afterward, a member of the audience told me: "What really worries me is that you are trying to pursue the idea of sustainable development in the Third World. But where it ought to be pushed first is in the industrialized world, and you are in no position to do that." That was challenging indeed. The World Bank can put environmental conditions on loans to the Third World, but what can it do with respect to the industrialized countries? We run into the problem that President Sarney presented to Senator Wirth—we expect the Third World to adopt constraints on their

____________________
Herman Daly is senior economist with the Environmental Department of the World Bank.

-13-

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