The process of wealth creation (1 September 1996)



We live in a world that is wealthier than ever and the process of wealth creation is now increasing following a period of lull or even no growth in many countries. Despite this, the rich have never felt more poor and this is particularly manifested in the treatment of social and welfare programs at the national level and of the wealthier industrialized countries towards the developing countries.

Remarks by Maurice Strong at luncheon address at Massachusetts Institute of Technology Symposium on Financing Sustainability Strategies, 5 September 1996

The Earth Summit, held in Rio de Janeiro in June 1992, called for a transformation of industrial civilization which requires fundamental changes in behaviour and priorities on the part of governments, individuals and institutions and produced some historic agreements designed to provide the blueprint for this transformation. After difficult and intense negotiations, developing countries joined in the consensus which produced agreement on a Declaration of Principles, the Declaration of Rio, and an action program to give effect to them, Agenda 21, as well as two critically important conventions, one on Climate Change and the other on Biodiversity.

At the same time they made it clear that they could not be expected to make the transition to sustainable development called for by the Rio agreements, without the "new and additional financial resources" and access to technologies which this transition requires. The bad news is that since then, Official Development Assistance has actually declined and a growing proportion of it has been devoted to meeting acute and immediate humanitarian needs and a lesser percentage to addressing the longer term, underlying development deficiencies which give rise to these tragedies. This is an ominous and worrisome trend but one which, unfortunately, seems likely to continue.

Some good news


But there is also some good news. Despite their disappointment that the prospects for new and additional financial resources raised at Rio have not been fulfilled, many developing countries have nevertheless taken some important and promising steps to give effect to Agenda 21 and the other Rio agreements in their own national development policies and practices. They recognize that sustainable development is not just something they do in response to the exhortations of industrialized countries, but to set their own national development on a pathway which offers a more secure and sustainable future for their people. And despite overall declines in ODA, some donors have been willing to lend increased support to many of these initiatives.

Let me cite Central America as a promising example. Although the seven countries of Central America are relatively small in relation to the larger developing world of which they are a part, they are in many respects a microcosm of the issues facing most developing countries - rapid population growth, resource-based economies struggling with the challenge of reconciling modernization with traditional values and practices and a growing dichotomy between rich and poor. The conflicts that have preoccupied the region in recent years have exacted a high price in both human and economic terms. Emerging from this period, they now face the monumental task of rebuilding their societies and have decided to do so through sustainable development. Responding to the leadership of peaceful and progressive Costa Rica, and its dynamic young President Jose Maria Figueres, they have established a Central American Alliance for Sustainable Development. And President Figueres has committed his government to making Costa Rica a world-class laboratory for the achievement of sustainable development.

Reconstruction


In a recent visit with him, he described how much of the widespread destruction resulting from the aftermath of the torrential rains that afflicted the southern region of the country recently was clearly attributable to past development practices which had been environmentally unsound and unsustainable. He outlined his plans for ensuring that the reconstruction of the region would be designed to provide a positive demonstration of sustainable development. This, together with the other initiatives being undertaken by Costa Rica and its Central American neighbours, provide an opportunity for the international community to provide the kind of support that can tum this region into a sustainable development success story that will encourage and inspire others.

The rapidly developing countries of Asia and Latin America have been leading the resurgence of growth in the global economy and attracting large-scale inflows of private capital. These inflows have grown to the extent that flows of private capital to developing countries, on an overall basis, now surpass official development assistance. But while this has enabled larger and rapidly developing countries to obtain much of the external capital they require, the poorer, least developed countries, particularly of Sub-Saharan Africa, continue to be dependant on official development assistance.

The decline in the flows of official development funds to developing countries has been accompanied by a recession in political will and financial support for environment and sustainable development in industrialized countries. The rationale is the need to cut back on national budgets and to concentrate government resources in areas that are seen as being of more immediate domestic interest, particularly employment. But evidence now being compiled for a study by the Netherlands Institute for Research on Public Expenditure for the Earth Council, makes it clear that hundreds of billions of dollars are now spent by governments in both industrialized and developing countries on direct and indirect subsidies which provide incentives for policies and practices which are environmentally unsustainable as well as economically costly and inefficient.

Energy subsidies


This study indicates that in the early 1990s energy subsidies alone amounted to some 350 to 400 billion dollars worldwide, almost 2 per cent of world GDP. It is estimated that removal of subsidies on fossil fuels by OECD countries would reduce their CO2 emissions by ten to fifteen percent without impairing economic growth. In other sectors, like agriculture, transport and water, there is an immense potential to combine large scale economic benefits with environmental improvement through removing or shifting subsidies. Thus, it is evident that better, more effective use of existing budgetary resources would be more than sufficient to enable OECD countries to make the transition to sustainable development, to which they agreed at Rio, while providing developing countries with the support they will need to effect the transition to sustainability in their economies. There is no question in my mind that the re-deployment and re-orientation of existing government funding to provide positive incentives to sustainable development offers the single most important and promising prospect for implementing the results of the Earth Summit and moving both industrialized and developing countries on to the pathway to sustainable development.

As UNCIAD has pointed out trading of emission permits provides a promising basis for using the market system to channel funds to the places in which they will buy the most reductions in emissions while transferring significant new resources to developing countries. The Earth Council is leading an initiative to establish a Global Environment Trading System to do this, firstly for CO2 emissions.

It is now evident that most industrialized countries will not meet the initial targets set for reductions in CO2 emissions. At the same time the rapid growth in energy use by developing countries is producing a corresponding growth in their CO2 emissions. Ultimately the deepening risk of climate change will force us to modify our patterns of energy production and consumption so as wean us off our current addiction to fossil fuels. In the meantime, an accelerated effort must be made to effect substantial improvements in the efficiency with which we use existing energy sources, and to develop alternative, non-fossil, fuel sources. Some extremely promising progress is being made in this respect here at MIT.

Government funding

Reductions in governmental funding have made it increasingly important that government financing be directed to those areas which lever and support private sector funding, particularly in providing the public infrastructure and services on which private investment often depends and cannot normally be expected to finance. However, the growing movement to privatization of electric power, transport, water supply and other sectors which in many countries governments have traditionally monopolized is attracting large amounts of private capital. And there are a growing number of examples of private-public partnerships in which financing is provided through a mix of government and private funds. The World Bank Group under its dynamic President, Jim Wolfensohn, is leading the way in the countries of the developing world, the former Soviet Union and Eastern Europe which it serves.

The International Finance Corporation, which partners with private investors, and the Multi-lateral Investment Guarantee agency, which supports private investment by providing insurance against political and related risks, have been expanding rapidly and the World Bank itself is re-orienting its lending to governments so as to facilitate and support private investment. The IFC is in the process of launching a new private sector fund for financing of renewable energy. The World Bank Group has also been developing partnerships with private foundations in mobilizing new sources of capital to meet social and educational needs for which profit-seeking capital is not available.

Administrator Gus Speth is providing enlightened and vigorous leadership to the United Nations Development Program, as the principal funding agency of the United Nations System in multiplying the impact of its own funds through mobilizing and stimulating funding from a variety of other sources. The regional development banks and bi-Iateral donors have also been moving in this direction. The net result is that impressive and promising progress is being made through the multi-lateral development agencies to make public and private funding mutually supportive and reinforcing, achieving more "bang for the buck" for both public and private investment in sustainable development.

Financing mechanism

Particularly noteworthy is the role of the Global Environment Facility, the only new financing mechanism to have emerged from the Earth Summit process. It is unique in other respects as well. It is a new financing mechanism, without being a new institution. Although it has its own governing body and small core staff under the able leadership of Dr. Mohamed El Ashry, its funds are actually managed and disbursed through its three partner organizations - the World Bank, the United Nations Development Program, and the United Nations Environment Program. And its funding is specifically designed to cover the incremental costs of ensuring that important project and programs meet sustainable development requirements, particularly those undertaken pursuant to the Conventions on Climate Change and Biodiversity.

If private investment does not become a positive vehicle for sustainable development, there will be little hope of achieving it. Yet we cannot afford to wait until enforceable international agreements can be reached. Accordingly, the World Bank has taken the initiative, building on the work of the World Resources Institute, the DECD, and others, to develop voluntary guidelines and criteria for private investment in each of the principal development sectors. This process will involve consultations with developing countries, industry, environmental organizations, development finance institutions and other stakeholders. It promises to make an important, indeed essential, contribution, to a private-sector led transition to sustainable development.

These are encouraging examples of private sector leadership in the financing of sustainable development. The World Business Council for Sustainable Development has taken an enlightened lead in stimulating and facilitating investment and sustainable development on the part of some 120 major corporations that are its members. It has also recently produced a new book "Financing Change" co-authored by its founder, Dr. Stephan Schmidheiny, and leading Argentine Industrialist, Federico Zorraquin, which follows its influential report to the Earth Summit "Changing Course", and makes a strong and compelling case for the use of the financial markets to finance sustainable development.

Private investment


Private direct investment is also one of the most effective means of transferring technology. Corporations normally find it is in their best interest to use the latest state-of-the-art technologies in plants which they establish in developing countries, even when governments of these countries do not require them to do so. Unfortunately, this is not nearly so true in respect of investments in the extractive industries, particularly mining and forestry. Stephan Schmidheiny himself continues to practice what he has been preaching by developing new mechanisms for investment in sustainable development, particularly in Latin America. His is one of many encouraging examples in which private entrepreneurs and investors are leading the way.

Some of these examples are very close to home, right here at MIT. As one of the world's leading research universities, MIT continues to be in the forefront of both the fundamental scientific research and its applications through technology and under the enlightened leadership of President Charles Vest, has made a strong commitment to sustainable development. It has already had notable success in translating the results of its research and development into commercially marketable products and services which contribute substantially to the prospects for realization of sustainable development through the marketplace. Much of this research and development was originally funded by governments, and the commercialization of its results using private capital, represents the specially fruitful kind of public-private partnership which has produced impressive results in such fields as pollution prevention and control, energy, materials and resource management.

The process of wealth creation


At a time when austerity and budget cuts are the order of the day for virtually all governments and international organizations, it is useful to remind ourselves that we live in a world that is wealthier than ever and the process of wealth creation is now increasing following a period of lull or even no growth in many countries. Despite this, the rich have never felt more poor and this is particularly manifested in the treatment of social and welfare programs at the national level and of the wealthier industrialized countries towards the developing countries.

The use of private capital in areas in which government has traditionally been the primary source of funding is no longer an ideological issue for most. It is a pragmatic response to changing insights and conditions. After all, government funds are in the final analysis derived from the same sources as private funds, from people -as taxpayers, lenders to government and owners of pension funds, investment trusts and corporations. It is just that people have realized that their funds can be utilized more effectively by investing them through private channels rather than entrusting them to governments. This has given rise to a proliferation of new and innovative initiatives and financing mechanisms and a new era of creative partnership between public and private finance. It is an era which has just begun and which, I submit, opens some extremely promising and exciting opportunities for financing of the transition we must now make to the new, sustainable economy of the 21st century. You are clearly amongst the pathfinders of this new era and I am pleased to have the opportunity of sharing this experience with you.