Distinguished Speaker Seminar: Euston Quah - Sustaining Growth and the Environment: What Asian Governments Can and Should Do?

Euston Quah, Head of Economics and Acting Chair of the School of Humanities and Social Sciences at Nanyang Technological University, delivered a lecture entitled "Sustaining Growth and the Environment: What Asian Governments Can and Should Do?" at an ADBI Distinguished Speaker Seminar in Tokyo on 2 September 2010.

Asian economies continue to grow and projections for economic growth in the short to medium term are rosy. However, this growth is also having negative local, regional and global environmental impacts, Professor Quah argued. The key challenge for Asian governments, in his view therefore, is to pursue the twin goals of continued economic growth and affluence, on the one hand, and environmental conservation, on the other. The success of achieving this will hinge on whether Asia will be able to develop sustainably, for which more pragmatism is needed at all policy levels. At the local level, individual governments should adopt sound environmental policies, whereas at the regional and global levels, they should adopt a "bottom-up" approach, rather than a "top-down" approach, as policies adopted within a country tend to be more useful than international treaties.

Professor Quah suggested a number of policies crucial for sound local environmental management, each based on basic economic principles. Although they seem easy to implement, governments have been displaying many shortcomings in trying to do so.

• Getting prices right: It is important that the price observed in the marketplace reflects the true social opportunity cost of using the resources.
• Greater employment of appropriate and inclusive Cost Benefit Analysis (CBA): CBA should be undertaken to ensure that the proposed projects yield the largest net benefits and capture all intended effects. It is important to ensure that gains should not go to only one particular group of society while others are saddled with the costs.
• Accounting for externalities and non-market goods: CBA must include the price of externalities and non-market goods.
• Adopting Damage Schedules: This is an approach that relies on society's preference to rank examples of environmental loss and economic activity. It is a cost-effective, practical, and reliable method suitable for Asian governments having to operate with budget constraints.
• Expanding market solutions: Sustainable development will require adjustments in both production and consumption. Market solutions (e.g., emission taxes, cap-and-trade systems, deposit refund systems) are instrumental for creating incentives and disincentives.
• Establishing baselines and green accounting for environmental variables and pollutants: It is essential as correct data must be gathered first of all. A minimum acceptable environmental quality level must be set as a guiding principle. However, not many Asian countries have adopted it yet.
• Pursuing green technology: Any long-run solution must involve green technology, but care must be taken to avoid possible conflicting end results of green technology.
• Working with stakeholders: Even a well-intentioned and well-planned project can fall apart if it lacks popular support. Prior consultation with stakeholders minimizes the risks of ex-post unhappiness and increases the likelihood of being able to reach an acceptable solution in case stakeholders' interests are compromised.

Professor Quah pointed out five key challenges faced by Asian governments in resolving the environment issue. First, he addressed the so-called not-in-my-back-yard ("NIMBY") challenge, that can lead to the failure of a planned project due to insufficient support by the people immediately affected. To deal with this type of problem, he suggested siting NIMBY facilities in areas where people would least mind it. Second, Asian governments face the challenge of pricing non-market goods. Green goods lack property rights and are not traded in the market which means prices have to be computed using alternative valuation mechanisms appropriate for each government. Third, he addressed the challenge of solid waste disposal arising from the fact that countries are becoming increasingly affluent resulting in higher consumption and an increase in waste generated. Some of the existing approaches are either too expensive and/or incomplete, or may even face the NIMBY problem. Professor Quah argued that ideally waste itself would be reduced by deploying an optimal mix of technology, education, a willing and complying public, economic instruments, control regulation, and cost benefit analysis.

The fourth challenge concerns trans-boundary pollution, Professor Quah noted. Typically, the benefits from polluting industries accrue to one city (or country), but costs are imposed on others. It is a difficult issue to manage as it involves sovereign nations. He argued that solutions must take into account the relative contributions to pollution and the cost of pollution abatement. He cited the "ASEAN Agreement on Trans- boundary Haze Pollution" as one successful example of dealing with this issue. Last but not least, trying to tackle any environmental challenge is incomplete without considering the challenges posed by climate change. Professor Quah observed that countries have varying preferences (i.e., developed countries tend to prefer environmental goods, whereas developing countries tend to prefer non-environmental goods), face different costs (i.e., developed countries tend to incur costs of replacing and retrofitting current infrastructure while developing countries tend to incur costs of building more energy efficient infrastructure), and have diverging perceptions of justice (i.e., historical burdens tend to be born by developed countries, whereas future responsibility tends to be born by developing countries). Professor Quah argued that agreeing on uniform cuts or establishing benchmarks will be difficult as countries are at different stages of development, further compounded by differences in marginal abatement costs. He thinks that a uniform global carbon tax might be a better solution. He pointed out other issues that Asian governments need to consider, namely: uncertainty regarding the magnitude of the impacts of climate change, biased media reporting, long run and short run trade-offs, and misattribution of weather phenomena.

Professor Quah presented a comparison of Singapore and Bangkok to test the Environmental Kuznets Curve hypothesis. His results showed that in a more developed city environmental amenities tend to be of greater importance to the lives of residents than certain transport and education amenities, whereas in a less developed city, residents' preferences for transportation amenities outweigh environmental preferences. He pointed out that, for global treaties to make headway, it may be better to allow some room for different countries and cities to proceed at their desired pace.

Professor Quah concluded that environmental problems are economic problems, and that economic instruments can be used, therefore, to solve these problems. Consequently, to achieve sustainable development, it is important to assess how to deal with environmental spillovers from economic development. Furthermore, instead of adopting a "top-down" approach by having a global benchmark imposed on countries, it is more efficient to use a "bottom-up" approach, i.e., motivating individual countries to adopt pragmatic environmental policies.