Natural Liabilities

Factories produce the goods that we want. They also spew out smoke. The smoky factory is, in fact, the classic image used by economists to illustrate the idea of an externality. The factory sells the goods but does not have to pay for the smoke. We now know that smoke is more damaging than previously appreciated. There is nothing more natural than carbon dioxide; it is one of the basic ingredients of life. Yet carbon has become a natural liability. It accumulates up in the atmosphere, trapping in heat. Of course carbon only becomes a problem when it passes the threshold at which it is excessive. We have passed that threshold. As the extra carbon traps in heat, the world heats up, and as it heats up the climate becomes more volatile. The consequences are wide-ranging, but Africa will be the region most severely affected. Africa is huge and climate change will not affect it uniformly, but it seems likely that the drier parts will become drier still, making staple foods unviable. Increased climate variation, which means droughts, floods, and bouts of intense heat, can wreak havoc with traditional cultivation. Agriculture, which is currently Africa’s main economic activity, will become less productive. A rapidly growing population will be scratching a living from a progressively less amenable natural environment. Carbon brings together the key themes of this book. Although it is natural, extra carbon is now a liability; there is nothing intrinsically benign about nature. It is emitted not just by industry but by a number of natural processes. For example, probably the most natural of all human economic activities is rearing cattle. Pastoralists have been ranging the wilderness for millennia. Unfortunately, in terms of global warming, they are more of a menace than nuclear power stations, which produce energy without emitting carbon. That is because cows fart. Being renewable, carbon shares much of the economics of fish and trees, except that instead of being a renewable natural asset it is a renewable natural liability. The damage it does depends not upon how much is emitted today, but on how much has been emitted cumulatively over recent decades.

Discovering Natural Assets

Natural assets are living dangerously: lacking natural owners they are liable to be plundered. Since mankind has had a long time in which to plunder, those depleting natural assets that are still around are there because they are difficult to extract. They lie beneath the earth, hence why they are called “subsoil assets.” Where are they? The world currently consists of 194 nation states, which can conveniently be grouped, as we’ve seen, into four roughly equal quadrants: the rich countries of the OECD; the countries of the bottom billion; Russia and China with their satellites; and the emerging market economies, such as India and Brazil. Each group occupies around a quarter of the planet’s land surface area. Occasionally national borders have been determined by the presence of subsoil assets. British colonial pioneers, for example, got wind of the existence of deposits of copper in central Africa and so pushed a railway line northward from South Africa. They found the copper belt in what is now Zambia. Having pushed over two thousand miles, however, they missed by some thirty the far richer copper deposits that now lie in the southeast corner of the Democratic Republic of the Congo. But usually, national borders do not reflect the endowments of subsoil assets to any significant degree. It would therefore be reasonable to regard subsoil assets as being randomly distributed between countries. Further, countries in the four groups are scattered across the planet. Although each group adds up to around a quarter of the planet’s total land area, it does not literally make up a quadrant, a neat quarter-slice out of a global orange. Since subsoil assets are randomly distributed among the 194 countries, and each of the four groups of countries is fairly randomly distributed around the earth, we might expect the law of large numbers to even out the distribution of subsoil assets among the groups. That is, while the random distribution over the 194 countries is likely to produce some spectacular differences between lucky and unlucky countries, by the time we have aggregated them into four massive groups the remaining differences should be much smaller.

Cursed by Nature? The Politics of Natural Assets

Are natural assets a curse? In The Bottom Billion I argued why I thought they often did more harm than good to the poorest countries. But the real measure is not just the damage they cause, but their harm relative to their potential. Natural resources are the largest assets available to these societies. Their known natural capital has been estimated to be worth double their produced capital. The failure to harness natural capital is the single-most important missed opportunity in economic development. Since writing The Bottom Billion I have accumulated more research on the subject, as have many others. Indeed, whether an abundance of natural assets is a blessing or a curse is currently one of the disputes raging among economists. There are some high-visibility instances of natural assets appearing to ruin a country: Sierra Leone’s diamonds, for example, seemed to shred the fabric of that society to pieces; Nigeria’s oil fueled the corruption of the political class. But are these just outliers? After all, Botswana harnessed its diamonds to produce the fastest growing economy in the world, and Norway used its oil to achieve the world’s highest living standard. The question becomes whether there really is a “resource curse,” and whether, if it does exist, it is limited to countries with deeper problems. I have come to regard this as the most crucial issue in the struggle to transform the poorest societies. The revenues that they could get from natural assets are enormous, dwarfing any conceivable flows of aid. They could certainly be transformative. If they deliver, any efforts to inhibit the extraction of natural assets from the poorest countries are not simply counterproductive but irresponsible, impeding the path out of poverty. If, on the other hand, natural assets backfire, then there is an argument for leaving them in the ground. There would indeed be the basis for an alliance between the environmental lobby, pressing for natural assets to be conserved, and the development lobby, fighting to end mass poverty.

Is Nature Priceless?

The indignant tears of a child command attention. Daniel, aged eight, has just learned about the Brazilian rain forest and it has moved him to his first expression of political outrage. It is directed at me, not as his father, but as representative of the generation of adults who are destroying something precious before he reaches the age at which he can stop us. Through sobs and rage he shouts, “Tell the president!” Having seen me on television, Daniel has a somewhat inflated impression of my influence. Eight-year-olds are not, on the whole, always repositories of good sense, and Daniel is no exception. But by chance his anger is right on target: son and father are ethically aligned in the battleground of natural assets. First, the left flank. I agree with environmentalists that nature is special: at some level most of us recognize that. But why is it special? Mainstream environmentalists, such as Stewart Brand, offer one answer. Nature is especially vulnerable and that matters because, being dependent upon it, mankind is thereby vulnerable. But as Brand argues, many environmentalists are carrying ideological baggage that needs to be discarded. For romantic environmentalists nature is incommensurate with the mundane business of the economy: it is in some way ethically prior. Echoing Baron d’Holbach’s diagnosis of modern angst, they see industrial capitalism as having divorced us from the natural world which it is rapidly destroying. You can sense their discomfort with modern industrial society in the language that they use, replete with words such as “organic” and “holistic.” For a recent variation on the theme of Holbach, watch Prince Charles delivering the BBC’s 2009 distinguished Dimbleby Lecture. Perhaps man needs to return to a simpler, nonindustrial lifestyle. Prince Charles produces organic food, and he has created a village, Poundsbury, in the style of the eighteenth century—the last age prior to industrialization. At the extreme end of romantic environmentalism the diagnosis is more radical: mankind itself has become the enemy of what is truly good. Reflecting these sentiments, there is now a considerable cult that relishes the prospect of the extinction of mankind.

Restoring Natural Order

For early man, little of the natural world was valuable. The few natural things that were useful were abundant, and therefore undemanding. Now, thanks to technology, far more of the natural world is useful, but it must satisfy the demands of over six billion people. Abundance has been superseded by scarcity, not because the natural world has diminished but because we now know how to exploit it. The result, in the absence of effective rules, and in its various manifestations, is plunder. Some of the things we might think of as natural are already adequately protected. The fish in a fish farm, the trees planted in a private forest: these are managed within a framework of incentives that is compatible with social interests. But there are two major holes in the protective web, and too much is falling through them. One hole is created by bad governance, and the other by the limitations of good governance. In other words, one is created locally, by specific governments in the countries of the bottom billion and their management of natural assets, and the other is global and involves management of those assets beyond national boundaries. The nonrenewable natural assets in the territories of the bottom billion are seldom harnessed for the development of their societies. As a result, future generations may inherit a depleted natural world with little to show for it. The once-only chance of using assets to lift these societies out of poverty through harnessing them will have been missed. The governments of many of the poorest countries are insufficiently held to account by their citizens for the good management of the natural assets under their control. The international renewable natural assets, such as the fish of the high seas, are liable to be plundered to extinction, while the natural liabilities, such as carbon, are liable to accumulate. The fish will have been eaten, and the carbon emitted, predominantly by the citizens of the rich countries. Throughout this book I have been guided by the haunting question of what future generations will think of us.

Investing in Investing

Harnessing natural assets for sustained development depends upon a chain of decisions, and the outcome is only as good as the weakest link in that chain. We have now reached the last link in the chain, and unfortunately it is the weakest. Suppose that the government has got each of the three previous decisions right: It has commissioned geological surveys that have revealed sufficient information about opportunities and thus been able to auction extraction rights for likely discoveries at good prices; it has designed a tax system which has captured the lion’s share of the rents that constitute the economic value of these natural assets; and it has saved the bulk of these revenues—less than 100 percent—because it judged some extra consumption to be consistent with meeting its obligations to the future, and, recognizing that the rate of return on domestic investment would be much higher than the world interest rate, counted on a capital gain to ease the burden of responsibility. All that remains—the final link—is to implement that domestic investment. Scaling up domestic investment is surely the very stuff of development: it builds the office blocks, constructs the factories, paves the roads, and generates the electricity that visibly distinguishes an emerging market economy from the bottom billion. Why might this final step be the most difficult? Recall that the International Monetary Fund has advised the governments of low-income countries to use the savings from the revenues on natural resources not to invest domestically but to acquire foreign financial assets. This is the Norwegian model, to which the more prudent finance ministers of poorer countries have been attracted. The Fund’s advice is based on a realistic sense of the problems involved: were the extra money spent on domestic investment it would be unlikely to yield an adequate return. Indeed, it might actually damage the economy by congesting fragile public investment systems and causing a collapse in quality. The overarching concept the Fund uses for these problems is “absorption”: the economy simply cannot absorb the extra spending.

Nature and Hunger

So far this book has been a plea that nature can be entrusted to the values of ordinary citizens. But my confidence is conditional upon people taking the trouble to be reasonably well informed about the scientific and economic issues involved. The natural assets of the bottom billion will continue to be plundered unless a critical mass of ordinary citizens realizes the importance of getting the key decisions right: the chain of decisions set out in part II. Carbon will continue to accumulate as a natural liability unless an equivalent critical mass is built, country by country. Informed societies are feasible, but they are not inevitable. Our relationship to nature brings into play powerful emotions and ordinary people can sometimes be misled into beliefs that may seem comforting but ultimately are destructive. Between 2005 and 2008 the world price of basic foods jumped by over 80 percent. In the slums of the poorest countries the children of the poor went hungry; had the price spike persisted they would have suffered stunting. This adverse shock had its origins in muddled popular beliefs about nature that have become increasingly common in the rich societies. In this chapter I am going to show how three such misconceptions exposed some of the world’s poorest children to hunger. In the poorest societies the rise in food prices was a major political event. To the typical household in these societies food is the equivalent of energy in America: if the price rockets people expect their government to do something. There were riots in some thirty countries; in Haiti they brought down the government. The increase in prices proved to be temporary; the global economic crisis was an effective though catastrophic remedy. But we cannot rely upon economic crises to come to the rescue. We need to understand why it happened and what can be done to prevent its recurrence. The immediate policy responses to the food crisis were dysfunctional even by the dismal standards of most international responses. They included beggar-thy-neighbor, pressure for yet larger farm subsidies, and a retreat into romanticism. Neighbors were beggared by the imposition of export restrictions by the governments of food-exporting countries.

Is a Fish a Natural Asset?

Oil, copper, and all the other minerals can only be used once: they are intrinsically depleting natural assets. But nature is also a factory, able to continue production indefinitely. This natural process of production is, of course, reproduction: fish, trees, pandas are all capable of reproducing (although pandas do not seem to be very good at it). Such renewable natural assets are a double blessing. We did not create them and yet we can harvest them for eternity. The menace of plunder is even starker with renewable natural assets than it was with depletable natural assets. The peculiar vulnerability of reproduction compared to other processes of production is that the continued flow of consumable goods depends upon the maintenance of a massive stock of them. If cars were produced in the same way as wood, General Motors would need a stock of many times its annual production from which to cull its new cars. Instead, it just needs a factory. Plundering a factory is not nearly as enticing as plundering a huge stock of the output. The incentive for the plunder of reproduction is therefore acute. We are able to enjoy the harvest from reproducible natural assets because previous generations refrained from such plunder. They did not exhaust the stock and so infringe the rights of future generations. What was the man who shot the last dodo thinking at the time? Perhaps not very much more than “got it!”; perhaps that since it was the last one it could not breed; or perhaps he did not realize that it was the last one until it was too late. Instinctively we sense that plundering a renewable natural asset to extinction seems an appalling error. Can economics add anything useful to such sentiments? In the simplest economies everything is sustainable: the economy remains exactly the same from one year to the next. This is not a world that we should necessarily aspire to. If everything stays the same, that includes the desperate poverty of the bottom billion. Nor is it now feasible: those nonrenewable assets are gradually running out.

Selling the Family Silver

Having waded through the “upstream issues”—getting revenue into a country’s treasury—it is now time for the “downstream issues”—using the money. This chapter is about a key choice: whether money generated from depleting natural assets should benefit the present or the future. To benefit the present the money should be spent on consumption. To benefit the future it should be saved: consumption should be deferred and revenue from assets used instead to acquire other assets which preserve their value. Economics is a crudely reductionist science and characterizes this choice as very stark. In reality most people get some pleasure from saving, you do not need to have the perverted values of a miser to take some pleasure now in the prospect of being able to consume something in the future. But economists usually abstract from such pleasure: the only thing that gives me happiness now—utility—is current consumption. So saving for the future is a transfer of happiness from now to later. Crude as this is, it surely captures a powerful feature of reality: most of us are not misers, we save because we are prudent. But consuming is more fun. We have now reached the heart of what is distinctive about the role of government in societies that are rich in nonrenewable natural assets. The exploitation of the natural asset is intrinsically unsustainable. At some stage the oil well is going to run dry, the vein of copper ore will be exhausted, and the revenue stream will cease. That word “unsustainable” sends shivers down the spine of every environmentalist. But just because the exploitation of a natural asset is unsustainable does not mean that it should be avoided. The only sustainable rate of use of a nonrenewable natural asset is zero. But were we never to use any nonrenewable assets they might as well not be there in the first place: the baby has disappeared with the bathwater. So, literal sustainability sets the bar absurdly high. Here economics is helpful in imagining a more meaningful conception: sustainability does not imply preservation.

Capturing Natural Assets

Once natural assets have been discovered comes the second link in the decision chain: how their value should be captured by society. “Captured by society” means that the value of natural assets should accrue as revenue to government, the representative of society. In the bottom billion there is often a gulf between what should happen and what actually does happen. The value of natural assets is captured, but not always by government. Sometimes we find plunder in its crudest form, as for example when a corrupt minister strikes a deal with a shady resource-extraction company. The minister gets handsomely rewarded and deposits his share of the profits in a foreign bank account. The company makes a fortune, which benefits its shareholders, none of whom are citizens of the country from which the natural assets have been removed. Underlying stories such as this are two distinct problems. The most obvious is corruption, just as at the prospecting stage. The interests of the country and its citizens are necessarily represented by its government, and indeed, not by its entire government but by a handful of people: perhaps the president, the minister of mines, and a couple of high officials. The resource-extraction company bribes these representatives, inducing them to ignore their professional responsibilities in favor of their personal interests. Bribes are, of course, never termed “bribes”; they are “facilitation payments,” often made by the resource-extraction company to local companies for unspecified services and whose beneficial ownership is opaque. There are two defenses against corruption: transparency and an effective legal system. Because governments are one of the parties to corruption, they are often reluctant to permit transparency and generate criminal investigations. Fortunately, however, each of them can be reinforced internationally. The Publish What You Pay campaign pressures resource-extraction companies into releasing information on the payments that they are making to governments. The idea is that once these payments become public knowledge it is much more difficult for corrupt officials and politicians to siphon off the money. Citizens match the money paid by companies to income entered on the official rolls.