So What's Wrong with Dumping on Africa?
Swaney, James A., Journal of Economic Issues
In February 1992, The Economist published an excerpt of internal World Bank memo written by lawrence Summers in December 1991. This sparked a short-lived controversy in print media and protests from environmentalists [Summers 1992]. Before The Economist's leak, Summers had issued a clarification, stating that his memo was intended as a "sardonic counterpoint" to an earlier draft text on environmental issues by another World Bank division [Anonymous 1992a; Weisskopf 1992]. Since the subject of this essay is the neoclassical logic expressed in Summers's December 1991 memo, for clarity of exposition, all references to Summers contained herein refer to the arguments expressed that memo.(1) Whether the December 1991 memo reflects the "true Summers" or not, he did find the logic sufficiently compelling distribute it. Further, the arguments that Summers offers do follow from neoclassical analysis even though they are usually stated in less obvious ways.
Summers's memo gave three reasons why the World Ban should encourage dirty industries to migrate to less developed countries (LDCs) [Summers].(2)
1. Since the cost of health-impairing pollution is
measured by foregone earnings, cost will be lowest
where wages are lowest.
2. Since "initial increments of pollution probably have
very low cost," overall costs of pollution would be
reduced by transferring pollution from dirty to clean,
3. Since demand for a clean environment is highly income
elastic, high-income countries' willingness to pay
to export pollution should lead to "welfare-enhancing"
Many thoughtful people, even some economists, find these arguments offensive to their moral sensibilities: there seems to be something quite repugnant in the notion that the wealthy enjoy the goods while dumping their bads on the world's poor. Yet, the poor would benefit if they were compensated sufficiently, wouldn't they? In some cases, the answer is yes, but in many cases this is the wrong question. What if the effect is to enrich the world's poor today while impoverishing them tomorrow? Are we willing to assume that LDCs will be so wealthy tomorrow that the legacy of today's hazardous wastes will be inconsequential? And what of the effects of rich-to-poor pollution trades on the development and implementation of cleaner technologies? Through the incentives they provide, are cheap dumps not likely to impede both the implementation of existing clean(er) technologies and the development of new ones? Even in those cases where pollution trades could result in "win-win" bargains, there are good reasons to regulate such trade. We will return to these reasons and suggest a policy approach after reviewing Summers's arguments more closely.
Summers's first argument is that the lowest wage country is the lowest cost country because "the measurement of the costs of health-impairing pollution depends on the foregone earnings from increased morbidity and mortality" [Summers]. This is somewhat like "measuring" an iceberg by guessing its height: while useful for casual, distant comparisons, it is dangerous for navigation. Summers's argument presumes two key relationships: one is between productivity and earnings; the other is between earnings and the value of health and life. Earnings would reflect productivity in a purely competitive world market system at full employment, free of all forms of market failure. Such conditions are so unworldly that we can summarily reject this application of marginal productivity theory on the grounds that it is an astounding leap of faith. Assume, however, that divine intervention or a freak accident of nature aligned earnings and productivity. Then foregone earnings would indeed provide a measure of the costs of pollution, but how good a measure? The method of discounted future earnings is commonly used to help determine compensation for wrongful death or injury, but its grounding is weak in both ethics and economic theory [Rhoads 1980]. …