Macro-economic responses to the impact of economic activities on the environment

Currently policy makers, whether private or public, generally ignore the relationships between macroeconomic policy-making and the environmental consequences of these policies. Therefore, it needs to be demonstrated first how fiscal and monetary policy impacts on sustainable development. In the next paragraph possible outcomes of changes in economic policies are discussed. Three possible scenarios will be sketched as general cases that can be adapted to a whole array of situations. These scenarios involve taxes, subsidies and the interest rate – the main policy instruments at the government's disposal.

Firstly, the tax base in South Africa, as in most other countries, is tax on income earned (e.g. PAYE), wealth (e.g. estate tax) or expenditure (e.g. VAT). The outcome of the economic system is therefore taxed rather than the inputs or negative external effects. This implies that the performance and not the utilisation of scarce resources is taxed. Under such a tax system, there is no incentive to save natural resources or use them wisely. Wastes can therefore occur, which are not in accordance with sustainability, and are not accounted for. An example is the absence of markets for clean air. There is no monetary incentive for a producer to produce his products in an environmentally sustainable way and in so-doing reduce his levels of pollution and waste. An environmental tax which would make the producer pay for polluting the air, or water, would increase his production cost, and therefore provide an incentive for him to reduce his pollution levels.

Secondly, a government subsidy tends to lower the price of a product or commodity since it is generally perceived to be beneficial to the economic and social welfare of the country. A subsidy, however, tends also to stimulate consumption and hence production and therefore even the extension of credit. Should natural resources be used in the production of the subsidised product, the use of the resource is increased. This may result in the wasteful use of such a resource. Water subsidies, especially for agricultural production, promote the inefficient use of water.

A last general scenario to indicate the relationship between the macro economy and the environment is by means of a change in interest rate. A decreasing interest rate has, through the transmission mechanism, a stimulating effect on fixed investments. A capital project that was not feasible before the decline in the interest rate may become feasible since the net present value of the project will increase. Although this will have positive economic, albeit possible inflationary, impacts, the decline in interest rate will have an impact on the marginal value of land and hence land use patterns. Land that was considered not economically productive may become economically productive. This, however, does not mean that the change in land use will contribute to sustainability.

As these examples indicate, current macroeconomic policy responses do not take the impacts on the environment into account. This omission has serious long-term implications for sustainability as resource consumption is encouraged and not accounted for. This leads to the "tragedy of the commons" whereby it is beneficial to exploit resources as fast as possible, before somebody else does, as they are "free". This may lead to short-term individual gains but in the long-term is in no-one's interests as resources degrade and disappear, having negative knock-on effects throughout the economic and social systems.

However, a significant force in recent years has been the application of environmental economics which attempts to put monetary values on natural resources and the costs associated with environmental degradation. For example, research done on the costs of water usage by alien vegetation in the Western Cape was a significant factor in the development of the Working for Water Programme. Valuation of coastal resources showed that the value of coastal resources to subsistance livelihoods totaled R15.2 billion, commercial fishing is worth R1.7 billion per year, employing over 90 000 people directly and indirectly, and the value of coastal ecosystem functions was estimated at over R44 billion per year. These results significantly contributed to the development of a new Coastal Management Policy (Green Paper 1998). In cities such as Durban, studies have shown the value of "open space" services to be at least R1.83 billion per year. These values have led to considerably higher priority being given to open space in urban planning initiatives.

There has also been extensive pressure from the scientific community to include natural resources in a system of national accounts (whereby natural resources are included in records of capital assets). The proposal has reached the office of the deputy president and, if implemented, will constitute a significant step along the sustainable development path.

>     Economic Environment: Outcome

There is also information about the Economic Environment in the following reports:
Metropolitan reports:
	Cape Metropolitan Council (1998 edition)		Durban Pilot Study
	Greater Johannesburg Metropolitan Council (1999 edition)		Greater Pretoria Metropolitan Council (1999 edition)