Economic growth can exacerbate pollution and pollution-related health problems in developing countries. Yet the capacity to reduce pollution and to realize production and consumption patterns that stabilize pollution are dependent on such growth. Thus developing countries must prioritize their environmental problems if they are to avoid derailing growth while achieving environmental improvements. Benefit-cost analysis may be useful in this prioritization, but its application is problematic. Are pollution-health relationships from studies performed in developed countries transferable to developing countries? Are ways of valuing individuals' willingness to pay for reduced health risks in developed countries appropriate for developing countries? And does poverty in developing countries exert an undue influence on this willingness?
Until the last decade, it was thought that developing countries could postpone environmental improvements while awaiting economic growth. Better understanding of the complex linkages between the environment and economic growth now suggests the need to devise policies for dealing with the former without derailing the latter. This need has been intensified by increasing environmental degradation in even the wealthiest of the developing countries and by the realization that the well-being of developed countries can be significantly affected by activities in the developing world. The fear is that continued population growth and economic growth, along with the energy- and materials-intensive consumption patterns they bring, will contribute to further environmental degradation in developing countries.
There is a basis for such fear. More than 90 percent of world population growth is occurring in developing countries, where population is expected to rise from 4 billion to 7 billion by 2025. Thirty percent of this growth will occur in Asia (excluding China) and 58 percent in Africa. Most of the population increase will be in cities, as it has been in the past. Along with population growth will come increased demand for drinking water and sewage and solid waste disposal, as well as for some energy-intensive products and services such as transportation. To the extent that per capita incomes rise, such demand will be exacerbated.
On the other hand, economic growth creates the capacity to reduce pollution, provide basic government services (such as drinking water), and improve medical care. The tight negative relationship between infant mortality and per capita incomes provides evidence of the importance of development for improving health status. In addition, some changes in the composition of goods produced and consumed as economic growth proceeds—for instance, the tendency to reduce heavy industry and to substitute cleaner fuels like natural gas for dirtier ones like wood or coal—can at least help to stabilize environmental pollution even as national product rises.
Economists favor use of the efficiency criterion in prioritization of environmental problems because it captures the tradeoff between benefits and the resources given up to obtain them.
The development-environment dilemma points to the need for a framework for establishing priorities to facilitate efficient allocation of the scarce resources available to developing countries. Benefit-cost analyses that include the monetization of environmental effects are a point of departure in the construction of such a framework. Yet in developing countries, application of such analyses is almost nonexistent. Indeed, serious questions can be raised about whether the benefits of environmental improvements can be estimated in developing countries with the approaches used in developed countries.
Prioritization on the basis of net social benefits
To establish priorities for pollution reduction, economists favor use of the efficiency criterion as embodied in benefit-cost analysis. Priorities are ranked on the basis of their net social benefits. The advantage of using benefit-cost analysis is that it simultaneously captures the tradeoff between the beneficial aspects of pollution reduction and the real resources society must give up to obtain this reduction. This tradeoff is of particular importance for developing countries because the opportunity costs of their resources are so large.
Prioritization of environmental problems using benefit-cost analysis requires estimates of the benefits and costs to society of marginal reductions in emissions in the pollution categories to be ranked. The benefits of such reductions are expressed, in theory, as the value of the impacts avoided by such reductions and are obtained by estimating the effect of changes in emissions on pollution concentrations, the associated effects of changing concentrations on health and other areas of concern, and the willingness of individuals to pay to avoid the negative impacts of emissions.
In modern benefit-cost analysis, each individual in society is asserted to be the best judge of his or her own values, which are determined in the context of constraints, be they money, time, health, or something else that is valued. These constraints imply that a thing has value to the extent that individuals are willing to pay to have it—the so-called willingness-to-pay (WTP) measure.
A less preferred but more frequently applied approach for ranking pollution problems uses the gap between standards for ambient pollution concentrations and actual pollution concentrations. This approach establishes priorities for pollution reduction by ranking highest those pollution problems leading to the grossest violations of ambient standards. One drawback to this approach is that the pollutants that are the grossest violators may not cause the greatest number or the most serious health effects. A second drawback is that no consideration is given to the social costs of dealing with each of society's environmental problems.
Estimating benefits and costs
A benefit-cost analysis involves defining scenarios of desired changes that would result from intervention; establishing baselines against which to measure such changes; estimating changes in emissions, concentrations, and exposures; estimating resulting impacts (physical effects); valuing these impacts (benefits); and estimating the costs of achieving desired changes. These elements of benefit-cost analysis are considered below, using as examples two potentially major pollution problems in developing countries—ambient particulate concentrations as they affect mortality, and the unavailability or poor quality of drinking water as it affects both morbidity and mortality. These problems and their associated health effects are more serious in urban areas, with their high populations, than in rural areas. They have received comparatively little attention in developing countries.
Defining scenarios. Cost-benefit analyses tend to be designed to estimate the total damages from a pollutant or the benefits of a total cleanup of a pollutant. Analyses so designed have limited usefulness when a real decision is to be made on an investment or on implementation of a policy that will incrementally affect pollution levels or health risks. Thus cost-benefit analyses should specify scenarios in terms of concrete changes in baseline conditions that would result from an intervention. With respect to particulate concentrations, the scenario might define the desired change in particulate emissions from power plants, for example. With respect to water quality and access, it might define the change in the number of people served by piped drinking water.
Providing access to drinking water is more effective in reducing diarrheal disease than is improving drinking water quality
Establishing baseline conditions. To establish the baseline situation for the particulate concentration problem, it is essential to have an emissions inventory against which to measure a change in particulate emissions and some idea of the size and spatial distribution of the exposed population. For the water pollution and access problem, information on the number of people currently served with drinking water, the rate at which people use the water, and measures of access to and reliability of the drinking water supply are needed to appropriately assess the baseline situation.
Estimating changes in pollutant concentrations. Changes in pollutant concentrations need to be estimated for the particulate concentration problem but not for the water pollution and access problem. Changes in particulate concentrations can be estimated using dispersion models, the parameters of which are based on local ambient monitoring data.
Estimating impacts. To estimate the human health effects of ambient particulate concentrations, dose-response models are needed to quantify the relationship between these effects and exposure. An extensive series of studies use daily measures of ambient particulate (and other pollutant) concentrations to explain variations in daily mortality rates for a city. The most recent of these find that a reduction of 100 micrograms per cubic meter (µg/m3) in concentrations of total suspended particulates (TSP) would result in a 20 percent reduction in city-wide mortality rates. (Many cities in developing countries have TSP concentrations in the 300-400 µg/m3 range.)
However, there is a question about whether dose-response relationships from studies performed in developed countries are transferable to developing countries. Transference of air pollution-health relationships may be problematic because of differences between the developed and developing worlds with respect to baseline health status, the availability of drugs and health care, and the number and kinds of environmental insults. However, in benefit-cost analysis use of these relationships appears reasonable as a means of obtaining a lower-bound estimate of the reduction in the risk of mortality if it can be assumed that lower health status, poorer medical care, and greater insults would make the health benefits of pollution reduction larger in the developing world than in the developed world.
Generally, no dose-response relationships concerning polluted drinking water and the incidence of morbidity and mortality are available. Therefore concentrations of microorganisms in water need not be estimated. However, studies that have examined the effect of various types of interventions to improve drinking water quality or access on mortality and morbidity can be used. These studies directly link specific interventions to health effects even though multiple pathways of exposure are involved. They suggest that providing access to drinking water is more effective in reducing diarrheal disease than is improving drinking water quality and that the most serious dangers to health may occur when a water supply that normally provides water of a reasonable quality fails.
Valuing damages. Valuing health damages or the benefits of avoiding them is a complex undertaking. To value premature death, economists use a measure of willingness to pay termed the value of a statistical life (VSL). This measure is obtained by dividing average WTP by the risk reduction being valued. For ex-ample, if the WTP is $100 for a reduction in risk of premature death of 1 in 10,000, the VSL is $1 million.
Most research has been directed toward valuing risks of accidental death, with estimates of VSL in the range of $1 million to $8 million. Very few studies value death associated with environmental exposures—death that generally involves older people, a latency period between exposure and manifestation of impaired health, and involuntarily assumed risks. VSLs for reduced risks of environmental death have been found to be much lower than those for accidental death. However, values for reduced risks of accidental death are typically used in benefit-cost analyses involving risks of death due to environmental exposures. This practice is due to methodological problems in and the limited number of studies that value reductions in risks of death associated with environmental exposures.
Reductions in risks of premature death by accident have been valued in two different ways. One way is to examine pay differentials across a sample of occupations posing different annual mortality risks. By holding constant other attributes of the occupations and the workers, it is possible to estimate how much extra compensation is required to induce people to accept slight increases in job risk.
Application of this approach in developing countries would be problematic. For the results to reflect preferences for avoiding risks, labor markets would need to be reasonably competitive, and workers would need reasonably good information about the risks they face on the job. Neither of these conditions is likely to hold in developing countries; thus it is unlikely that wage differentials in these countries would accurately reflect job risks.
The contingent valuation approach to measuring individuals' willingness to pay for reduced mortality risks holds more promise for application in developing countries than does the wage compensation approach.
Another way to measure individuals' WTP for reduced mortality risks is to use the contingent valuation method—that is, to ask individuals to state their WTP for reductions in health or environmental risks or effects, given hypothetical scenarios involving these risks or effects. This approach offers several advantages. First, surveys can be designed to elicit WTP for desired future change in risks or effects. Second, the good being valued can be specified to match other information available to the analyst, say the end-point given for a dose-response relationship. Third, the survey can be administered to a sample appropriate for the good being valued, say a sample representative of the general population or of some other group such as older people.
The contingent valuation approach does have drawbacks. The hypothetical and often complicated nature of the scenarios raises concern about whether individuals can process the information provided and be sufficiently motivated and familiar with the "goods" being valued to respond as if they were in a real situation. There is also concern that survey respondents might offer misleading answers in the hope of influencing the survey outcome and, thus, policy. However, this concern has diminished with attempts to systematize and standardize the development and conduct of surveys in terms of how goods are to be paid for, how risks are to be treated in scenarios, and how questions are to be phrased.
The contingent valuation approach holds more promise for application in developing countries than does the wage compensation approach, the flaws of which are clear. However, to the extent that education and cultural factors influence responses, lessons learned in the United States and Europe about the design of contingent valuation surveys would have to be relearned if these surveys are to be conducted in developing countries. In addition, current research has emphasized neither valuation of "life-years lost" nor the WTP to reduce risks to family members. Such research is needed to compare the mortality-related benefits of reducing particulates, which primarily affect older people with chronic respiratory disease, with those of providing increased access to drinking water, which primarily affects mortality in infants and young children.
However, before either of the above WTP approaches can be legitimately applied in developing countries, two issues need to be addressed: the basic tenet of individual sovereignty underlying benefit-cost analysis, and the influence of poverty on valuation. With respect to the former, not all societies may accept a notion of value based on individual sovereignty. While this concern was probably more important before the disintegration of communism, there are still societies that view social choices from the perspective of the group rather than the individual. For these societies it may be legitimate to value statistical lives by estimating the loss in social product from a worker's reduced lifespan. This "human capital" approach has been largely discredited in the United States, not only because it is inconsistent with the sovereignty of individuals, but because it cannot address the value of premature mortality in the elderly, the disabled, and other nonworkers.
With respect to the influence of poverty on valuation, there is a concern that severe limitations on ability to pay in developing countries may bias or even invalidate willingness-to-pay estimates. Much of this concern may derive from the presumption that individuals in developing countries would express a much lower VSL than those in developed countries. While the supposed gap in VSLs may be considered immoral by those who are concerned with equity, in the context of efficiency it is appropriate for income constraints to influence WTP. In any case, contingent valuation studies to elicit WTP for reductions in mortality risks are designed to limit the size of the risk reduction so that only a small portion of an individual's budget could conceivably be offered to obtain the benefit. This may be the reason that, empirically, income does not exert much of an influence on WTP responses. Contingent valuation studies valuing reductions in the risk of death have estimated income elasticities (the ercentage change in the value for a 1 Percent change in income) of only 0.3 to 0.4. For instance, a person with an in-come 90 percent lower than that of an-other person would be willing to pay only 27 to 36 percent less to obtain the same risk reduction. If this analogy is extended to a comparison of WTP in developing and developed countries, it is Conceivable that differences in WTP Might be far less than the gap in per capita incomes would suggest.
Concerns about the undue influence of ability to pay on WTP responses can perhaps be resolved by a search for units of account other than money. For instance, there is pervasive anecdotal evidence that people are willing to pay in terms of time for reduced risks of death. In this case, willingness-to-pay questions could be framed in terms of time rather than money, although for use in a benefit-cost analysis the analyst would still face the formidable task of valuing time.
Estimating costs. Estimating costs presents fewer technical problems than does estimating benefits. (This is the case even in developing countries, where pollution reduction activities may be subsidized and thus their real cost obscured.) When addressing the prioritization of environmental problems, a major difficulty involves the types of pollution reduction activities to be costed out. Consider activities to reduce ambient particulate concentrations. If the activities to be costed out are restricted to technologies to remove particulates emitted by industrial sources, costs may be far higher than they could be if a broader set of activities was considered. For instance, it may be far less expensive to reduce health effects by having a power plant pay for the purchase and installation of improved household cooking stoves than by reducing its own emissions.
The difference between willingness to pay in the developed world and that in the developing world might be far less than the gap between per capita income in the two worlds would suggest.
As control costs generally rise steeply with the percentage of emissions removed, the choice of emissions removal technologies to be considered can also make a big difference to the cost estimates. Less sophisticated technologies cost less than more sophisticated technologies and yet can be as nearly efficacious. For instance, new-generation electrostatic precipitators (ESPs) can remove 99.5 percent of the particulates from power plants using low-sulfur coal at a capital cost of $85 per kilowatt (in 1979 dollars); however, old-generation ESPs can remove 97 percent of these particulates at a cost of only $20 per kilowatt. With respect to improving water quality and access, less sophisticated but less expensive activities can be considered. These include the provision of yard taps and simple latrines in addition to indoor water supply and pipes for discharging sewage.
Challenges
Even in developed countries, the estimation of benefits and costs of environmental improvements is fraught with uncertainties and gaps in information. Thus benefit-cost analysis should only be viewed as a structured way of accounting for the advantages and disadvantages of a policy, using money as a numeraire and not as the sole criterion for judging the worth of a policy.
The growing application of benefit-cost techniques to prioritization of environmental problems in developed countries and the strong interest in the use of these techniques in developing countries presents a host of new challenges in the valuation of environmental improvements. Transfer of valuation functions that relate willingness to pay for reductions in health risks to income and other characterstics may be acceptable, but is surely no substitute for conducting contingent valuation surveys and performing other analyses in developing countries.
The need for development of cost and benefit estimates for a large set of pollution reduction activities cannot be overemphasized in developing countries. This set would include not only activities normally associated with pollution (such as industrial activities), but also household activities related to indoor air pollution and government activities to correct policy mistakes such as subsidization of energy markets and drinking water supply.
Alan J. Krupnick is a senior fellow in the Quality of the Environment Division at RFF.
A version of this article appeared in print in the January 1992 issue of Resources magazine.
A version of this article appeared in print in the January 1992 issue of Resources magazine.
