Prosperity and Its Discontents


The morning plenary session at the World Forum was on "Core Economic Productivity and Natural Capital in a Globalizing Economy." The patsy for this session was another hyper-rational director from McKinsey & Co., Bill Lewis, who is in charge of their Global Initiative. The McKinseyites have played the role, somewhat unwittingly, of the bad guys in the globalization dialogue. They make a presentation of how countries can become prosperous and then are excoriated for their "old ways" of thinking, for not thinking enough outside the box. and so forth. You gotta admire their spunk, though: The McKinseyites keep coming back, trying to bring facts and economics to people who prefer wishful thinking and politics.

Until two centuries ago, poverty was the human norm and much of the world is still quite poor. But why are some countries rich? Lewis divided countries into three groups. The first group is the U.S. and Western Europe, with the highest growth rates. The second group includes Japan and Korea, which have grown enormously but not as much as the U.S. and Europe. Why not? Because they get only half as much output from the same amount of labor and capital. The poorest countries are, not surprisingly, the least efficient at using capital and labor. "Most people in most countries are working," said Lewis. "The difference is how efficiently they work. The good news is that it takes far less capital than commonly assumed to boost labor productivity."

"The idea that capital is the enemy of employment is wrong," Lewis said, contradicting the oft-heard claim made during sessions at the World Forum that globalization "destroys livelihoods." In fact, he pointed out that the lowest levels of unemployment are generally found in countries with the highest levels of capital per capita. He contrasted India vs. the U.S. and pointed out that 63 percent of Indians are farmers and some 80 percent of Indians work in the "food chain." In the U.S. only 3 percent are farmers with a total 5 percent working in the "food chain." Economic growth does not result from a "push out" from agricultural sectors but from a "pull" into new sectors. In India many investments that should be made and which would greatly boost labor productivity are not made. Why not? "The answer is differences in public policy," said Lewis. By and large, private, for-profit companies perform better than publicly owned companies. Competition matters because it encourages efficiency and innovation which free up resources for other investments. Lewis pointed out that developing countries could open up and bring in a lot of foreign capital and new technologies.

Poland and Russia are natural experiments in economic reform. "Poland did the most thorough job of economic reform of any developing country in the world," said Lewis. At first, Polish Gross Domestic Product fell off a cliff, but now it's 30 percent above what it was in 1990 and climbing. Russia did not reform well and Russian GDP is only 40 percent of what it was before 1990. Policy makes a difference between growth rates in advanced economies too. There is an economic penalty associated with microregulation of markets (e.g., zoning laws, minimum wages, and commercial regulations like mandated store hours and retail sale prices, the norm in much of Europe). Lewis showed that labor productivity in Western Europe is only 70 percent of that in the U.S. "The problem of economic development comes down to good economic policies. It's as simple as that," concluded Lewis.

Next up was Rocky Mountain Institute Founder Amory Lovins. He began dismissing the previous speaker thusly: "Bill has just treated us to a logic that has guided previous economic development." Lovins argues that earlier economic growth was based on the premise of scarce people and abundant nature and that today the opposite is the case. He pronounces himself a proponent of "advanced resource productivity," claiming that businesses waste a lot of resources (this is the argument of his latest book, Natural Capitalism, which Lovins coauthored with Paul Hawken and L. Hunter Lovins, and which REASON reviewed in its July 2000 issue). He makes the point, as though he had thought of it all by himself, that if companies can reduce waste, they can increase profits. Of course, businesses are constantly seeking to cut costs for labor, machinery, energy, feedstocks, waste disposal, etc.

If the natural environment is deteriorating, it is because we treat the ecology the same way that communists treated economics. Unless one is a die-hard fanatic (and there were some at the World Forum), all the world knows that capitalism creates an improving economy that better supplies people's various needs–and that communism and public-sector ownership of business does not. It should not be a difficult conceptual leap to realize that communism for nature will produce the same results that it did for economies–degradation, waste, and decline.

So why not apply capitalism to the environment? Lovins actually does dimly understand this idea, but he misses the crucial point: property rights. The reason that capitalism increases economic efficiency over time is that property rights encourage the conservation of resources because users must pay owners for the resources. Nearly any environmental problem you can think of is the result of open-access commons where no one owns the resource and therefore has no incentive to protect it. Lovins is correct when he notes that many things he calls "ecosystem services"–like the natural water purification of swamps or watershed protection offered by forests–are unpriced, but his solution is "to do business as if nature were properly valued." Why "as if?" Why not get nature properly valued in the first place by incorporating environmental resources explicitly in the economic system by privatizing them? Make some owner responsible for them.

Lovins and his fellow-traveler Hazel Henderson want to rejigger accounting systems as a way supposedly to force companies to take the environment into account. This is as effective as redrawing the streets on a map as a way to bring about urban renewal. Lovins, Henderson, and other World Forumers have to recognize that if you want businesses to account for something, you must make them pay for it. And that's something only property owners can do effectively.

Lovins' theme of leaving the past behind was taken up by Steven Rockefeller, co-chair of the Earth Charter Initiative Steering Committee. Haven't heard of the Earth Charter yet? You will, and soon. Rockefeller is heading up a campaign to get the United Nations to endorse the charter by 2002. Rockefeller says that the Earth Charter is "soft law," which means that it is a statement of aspirations and intentions and is not legally binding. "However, historically soft law tends eventually to get translated into hard law," said Rockefeller. "The Earth Charter shifts authority from the outmoded ideologies of the last century to a new ecology of values."

There is a lot of aspirational language in the charter, a lot of which has the tinny ring of old-fashioned leftist slogans, e.g., "promote social and economic justice, enabling all to achieve a secure and meaningful livelihood," "ensure universal access to health care, etc." So much for leaving outmoded ideologies behind.

But the chief problem with the Earth Charter is that it enshrines the "precautionary principle"—the idea that all new technologies and practices need to be shown to do no harm before being allowed—as the basis for regulating the economy. Regulate first, ask questions later, is one way to view the precautionary principle. "You have to take the precautionary principle seriously, if you're serious about environmental protection and controlling biotechnology," said Rockefeller. "When there are high risks and limited knowledge, then don't do it," is the way Rockefeller interpreted the precautionary principle. Of course, that begs the all-important questions: What risks are too high and how much knowledge is enough? Fortunately, the Earth Charter tells us what standard to use: "Place the burden of proof on those who argue that a proposed activity will not cause significant harm." In other words, all new activities and technologies are guilty until proven innocent. That way lies cultural, economic, and even ecological stagnation. Watch out because Rockefeller will soon be asking your town council to endorse the Earth Charter as part of his 2002 timetable.

As the World Forum ended, then, it can claim at least this much: It provided a very good reason to start attending town council meetings.