Sustainability, CBA and EBA

higher overall number of job years. If a given project involves combinations of activities, the job years for each activity could be calculated, then summed over the entire area and life of the project. An important feature of EBA is that as certain activities give way to other activities over time e.g. cattle raising shifts to goat raising, as pasture becomes poorer, job years would be calculated for each expected activity over the chosen time period. A broader, but still quantitative, approach would be to compare economic activities andor develop- ment projects in terms of population support, i.e. the number of people supported by the activity on a given measure of land or other capital investment. Accounting would be similar to job-years, but instead of only analyzing workers involved in the given activity, this measure would also incorporate the workers’ families. This approach recognizes the complexity of household economic organization in developing regions and helps overcome the associ- ated measuring difficulty often encountered in project analysis in such regions. In fact, while the discussion in this section is in terms of ‘jobs’ largely for ease of exposition, the application in Section 4 is in terms of population support. The choice of time period should reflect the tension between the incorporation of sustainability and uncertainty. A longer time period incorporates greater consideration of sustainability, but is also more subject to mismeasurement arising from in- creased uncertainty surrounding economic and non-economic events over the time period; the reverse holds true for shorter periods. Uncertainty in CBA is usually recognized via sensitivity analysis 2 Boardman et al., 1996; a similar ap- proach could be adopted as a component of EBA.

3. Sustainability, CBA and EBA

3 . 1 . Capturing sustainability Definitions of sustainability are numerous and varying Toman, 1992. For the purposes here, let a sustainable project, economic activity, or devel- opment path be one in which the standard of living for people in a given locality or region is no worse for future residents than it is for current residents adopted from Goodstein, 1999. 3 The use of CBA in practice often ignores sustain- ability in several ways Toman, 1992; Costanza et al., 1997. The methods of discounting used in CBA tend to ignore any sustainability constraint and are biased toward the current generation unless current net benefits can successfully be reinvested to benefit future generations, often not a realistic possibility in developing regions. Sustainability considerations are present in most texts on CBA see, for example Johansson, 1993; Hanley and Spash, 1993; Layard and Glaister, 1994, but appear to be finding their way into application much more slowly. de Janvry et al. 1995 demonstrate the incorporation of sustainability into a CBA, but admit that, for example, limited access to capital can prevent successful implementation of activities deemed op- timal by CBA. Quite often reinvestment opportuni- ties, as imagined in the context of the theory of discounting, are not available or are unlikely to be realized due to institutional realities in developing regions. 3 The main competing type of definition of sustainability centres on the maintenance of human and natural capital stocks see, for example, Pearce and Atkinson, 1993. Assum- ing the purpose of maintaining capital stocks is to provide a nondecreasing standard of living, the distinction should not make any critical differences in the following discussion. Han- ley and Spash 1993 provide a comparison of definitions. Additionally, while sustainability involves no decline in stan- dards of living, sustainable de6elopment would certainly imply an improvement of standards of living. What constitutes ‘de- velopment’ is a complex and contentious issue that involves much more than employment and is beyond the scope of this paper. At a minimum, ‘sustainability’ as defined here would be a necessary, but probably not sufficient condition for ‘sustain- able development’. Thus, while ‘sustainable development projects’ are referred to extensively, the discussion of the merits of EBA is in the context of ‘mere’ sustainability. See also footnote 4. 2 Sensitivity analysis refers to exploring how evaluation re- sults change given changes in the assumptions that are used in the evaluation. Traditional CBA also gives no indication of who benefits from the economic activity under consideration. Developing regions are subject to high degrees of income inequality and capital flight Todaro, 1994. Thus, it is quite possible that a significant amount of the monetary benefits of a development project will not accrue to a broad base of regional inhabitants. In such a case, evaluating projects via discounted flows of net income will not give a good indication of whether the project is actually maintaining a given stan- dard of living for the people affected by the project. Additionally, CBA also masks whether a given economic activity will aid development via protecting environment services and facilitating their sustainable use, and does not indicate if the activity will protect the environment by providing people with alternatives to environmentally de- grading activities. In a larger sense, CBA assumes that the normative criteria for any economic ac- tivity, project, or development path is the maxi- mization of the net discounted stream on income; as described below, this often is not even the goal of small-scale development projects linked to environmental preservation in develop- ing regions. The case for EBA as an illuminating method of project appraisal is most obvious when it is ap- plied to development projects that are part of an overall environmental protection program. EBA can be used to compare between two or more such projects, but it is especially illuminating when such projects are alternatives to larger-scale, more traditional, capital intensive, and potentially unsustainable development activities. There is in- creasing recognition of a strong relationship be- tween sustainable development and local environmental protection in developing regions. The linkage between environmental protection and sustainable development goes in both direc- tions: sustainable development is necessary for environmental protection, in that people living in poverty are often forced to degrade the very envi- ronment upon which they depend Goodstein, 1999, and environmental protection is a neces- sary component of sustainable development, in that healthy environments provide essential re- sources for sustainable economic activity for ex- ample, Panayotou and Ashton, 1992; Repetto, 1998. As a result, governments and non-govern- mental organizations in developing regions are increasingly integrating sustainable development and environmental protection for example, Gregersen et al., 1989; Panayotou and Ashton, 1992; Goodstein, 1999. The structure of bio- sphere reserves is specifically in recognition of the link between sustainable, poverty-reducing eco- nomic activity and environmental protection Wells and Brandon, 1992. It is out of this context that the idea of EBA was developed. If the goal of a usually small- scale development project is to give local inhabi- tants sustainable economic alternatives to environmental degradation, why not use a mea- sure that relates directly to the goal? The vast majority of times, CBA simply does not evaluate how successful such a project might be in meeting its objectives, and can make such projects appear suboptimal relative to other development options. The goal of such development projects usually is not maximization of the discounted stream of net income or benefit, so in addition to masking the link between sustainable development and envi- ronmental protection, CBA can be an obscuring means of evaluation. Estimating the number of jobs a given activity or path will provide over 25 years for example, on the other hand, explicitly incorporates sustainability by measuring the de- gree to which workers or families will have means of support into the foreseeable future. 4 If an activity provides high ‘up-front’ employment, but is based on unsustainable activities that will de- cline within a foreseeable time, a time horizon can and should be chosen that will capture the trend, and in terms of EBA, the activity or path will 4 The degree to which ‘having means of support’ equates to non-declining welfare required for sustainability by the defini- tion employed here is foremost dependent on the way that ‘a job’ is defined. It is assumed that a job only counts if it does not involve a decline in the current acceptable standard of living. A similar point holds for population support. On the other hand, EBA purposefully gives no extra weight to jobs that provide substantially more pay or welfare. This prevents the improvement of one subgroup from masking in terms of accounting declines in welfare in others. Relaxation of this assumption is discussed in Section 5. look less attractive. If the goal of a given perhaps larger project is not sustainable development in the context of environmental protection, EBA can be a powerful tool to illuminate project shortcom- ings in these dimensions. 5 The use of discounting is both problematic and unnecessary in the context of EBA. Technically, it might be possible to conceive of discounting job- years or population support to present values, so that, for example, job gains in the future could be devalued to reflect the time preference of current economic agents in the same way as is done with net income in CBA. But ‘jobs’ are not a store of purchasing power; they cannot practically be ‘banked’ or directly reinvested and indirect ‘rein- vestment’ would seem to require serious methodo- logical convolutions. It would serve little purpose to try to ‘transfer’ jobs, say, from the current generation to future generations in the interest of sustainability. For a project that targets a given group of people at a given location, discounting andor transferring jobs over a time line or across generations is contrary to the general notion and purpose of sustainable development. Furthermore, the intergenerational equity that is inherent in sustainability is better captured without the use of discounting. Employment or population support counts the same whether it is at the beginning or the end of the time period. The analysis of benefits is thus blind to which generation is receiving the benefits. 3 . 2 . Beyond sustainability There are additional reasons beyond the need to incorporate sustainability into project analysis for considering EBA as a complement or substi- tute for CBA. First, employment itself matters significantly in the development process UNIDO, 1972; Todaro, 1994. For this reason, EBA could also find application in one form or another in any type of development project. Measuring employment as part of project eval- uation in developing countries also can be seen as a means of addressing equity issues. UNIDO 1972 points out that ‘…the desirability of em- ployment in the context of developing countries may be due mainly to its redistributional impact’. The authors in particular note the possibility that employment could be targeted toward women as a means of redistribution and ‘modernization’. They also note that redistribution via employment is less likely to be marred by corruption than direct subsidization of incomes. EBA is also consistent with ideas and proposi- tions forwarded by some of the harsher critics of standard neo-classical development theory. Trainer 1990, for example, argues that the con- ventional approach to development that relies on market forces and growth maximization has not only failed people, but has also been responsible for serious negative environmental impacts. ‘Ap- propriate and ecologically sustainable develop- ment’ requires, amongst other things, a focus on local economic self-sufficiency and independence from global economic forces. The use of EBA does not guarantee such a focus, but the emphasis on employment over income is more consistent with the approach Trainer 1990 calls for, and better captures the benefits of projects that em- phasize these features rather than projects that emphasize simple income growth. 3 . 3 . Weaknesses of EBA Of course, EBA would not be an ideal method of project evaluation in all circumstances. Because EBA is not denominated in monetary values, it does not capture monetary effects that do not translate into regional employment or population support. While the motivation for the develop- ment of EBA was in the context of small-scale, sustainable development projects where monetary effects are minimal, these projects sometimes ‘compete’ with larger-scale, capital intense, ‘tradi- tional’ development projects that have significant monetary goals and effects, and in such contexts EBA should be considered a complementary, 5 It is worth noting that EBA only evaluates environmental protection indirectly and to the extent that it is necessary for sustainability. Ideally, all projects should have separate analy- ses conducted along all dimensions of concern, especially analysis of environmental impact. It seems likely, however, that widespread adoption of EBA would lead to increased environmental protection. rather than substitute, form of analysis. A consid- erable concern for CBA researchers and practi- tioners in international agencies e.g. the World Bank, for example, is capturing a usually large- scale project’s impact on national net income, net exports, and labor markets, each a vital concern at the national level in developing countries. EBA would not be as effective as CBA at capturing these effects. However, the degree to which this is a ‘weakness’ of EBA depends on one’s perspective. Many would argue that such projects should also be analyzed in terms of regional sustainability, regardless of whether they are ‘competing’ with projects dedi- cated to regional sustainable development. The ‘appropriate’ method of project evaluation largely depends on what a project is meant to achieve e.g. export earnings and what it ought to achieve or at least not fail at, e.g. sustainability. This relation- ship holds for many of the issues discussed in this section: EBA is ‘less appropriate’ as a stand-alone method of analysis to the extent that a project has goals related to andor impacts on variables other than regional sustainable development. 6 Given the importance of sustainability, one might argue that assuming the necessary resources were available CBA be conducted for large projects involving significant monetary goals and effects, but that EBA be conducted for all projects. In addition to the effects noted above, EBA is not as well-suited as CBA for capturing the effects of projects that involve considerable amounts of money in terms of both project funding and rev- enue generation. For small-scale projects, however, these impacts can be assumed to be negligible. In Yucata´n, for example, sustainable development projects that are part of an environmental protec- tion program usually involve relatively small capi- tal outlays that peasants are expected to pay back; revenues are not expected to be greater than that necessary to support the family, which is accounted for in EBA. Similarly, EBA is most illuminating in the context of projects whose effects on market- wide wages are negligible. In most circumstances where sustainable development projects are ini- tiated, labor is drawn from an excess labor pool resulting from a non-clearing market wage, so negligible wage impacts would be the most com- mon situation. Even in cases where a project or development path requires a significant capital outlay, has non- negligible effects on wages or significant export earnings, or produces other monetary effects, the extreme importance of sustainability and employ- ment in developing regions suggests that EBA still be used in conjunction with CBA. EBA could be modified in several ways to account for monetary effects. For example, for project options that in- volve significant up-front capital expenditures, job- years per dollar or thousands of dollars, or thousands of pesos, etc. can be calculated for each option. Another approach would be to make all options subject to the constraint that cash outlays be recouped in a given period of time; only options meeting these criteria would be subsequently sub- jected to EBA. Such approaches would also be necessary in situations where more cash outlays could simply ‘buy’ more employment, which would presumably not be a sustainable situation. 7 The ability to make these sort of asssumptions concern- ing capital expenditures, wage effects, export earn- ing, etc., are, to a significant extent, why EBA is most appropriate in relatively less-developed re- gions; such assumptions would be much more questionable for analysis of a project in a highly developed region. 8 7 I am indebted to an anonymous referee for raising this point. Not all activities that can be analyzed via EBA involve external funding, and in the absence of such funding, EBA contains a profitability constraint, in that unprofitable activi- ties will not continue over the period of analysis. 8 Where more data are available, inputoutput IO analysis can be used to calculate employment effects of various alterna- tive economic activities or paths. IO requires considerably more data than either EBA or CBA; these data are less often available for developing regions or the organizations that work in them. 6 This point regarding very different objectives and out- comes of competing projects and activities is further addressed below in the context of supraregional ‘employment externali- ties’. The relative importance of various criteria for evaluating projects is controversial see, for example, Goodstein 1999 and likely to depend on fundamental beliefs concerning devel- opment processes and objectives. The political economy of development and its relationship to EBA is discussed in Sec- tion 5. Externalities can pose a challenge for EBA. As with CBA, EBA should try to capture all of the impacts of a given project or development path. Externalities such as those related to environmen- tal degradation tend to be thought of in terms of monetary costbenefits, but there is no reason they cannot also be considered in terms of job or population support costsbenefits. Local ‘employ- ment externalities’ direct and indirect job losses or gains to people not directly involved in the project or activity under analysis may require significant amounts of information regarding long-term impacts, but no more so than for CBA. Even if the impact of externalities such as envi- ronmental degradation are not initially in the form of jobs, they will usually lead, within the time period used in the EBA, to employment effects. An agricultural activity, for example, that leads to non-point pollution via the runoff of pesticides will likely eventually lead to employ- ment loss, possibly for example among fishers due to contaminated fishing grounds. Employ- ment externalities at higher levels also can be incorporated into the analysis, although probably with some difficulty. While the type of projects for which EBA is most illuminating are unlikely to generate supraregional employment effects, com- peting activities e.g. cattle ranching could con- ceivably create more supraregional employment than local employment. 9 Deciding ‘who counts’ standing is inherently subjective and con- tentious, as Boardman et al. 1996 point out in the context of CBA. Ideally, all of these effects could be accounted for, but in reality EBA is likely to emphasize local and regional employ- ment over supraregional employment and other supraregional effects. However, in a similar vein as the monetary effects discussed above, and given the definition of substainability used here focus- ing on local and regional residents, the localre- gional emphasis may actually be appropriate. 10 In any case, because the data necessary to perform complex analysis of supraregional impacts are rarely available at the regional level in developing countries, there is little expectation amongst prac- titioners or users that they be incorporated for EBA and CBA. Put another way, EBA may be considered ‘appropriate technology’ for project evaluation in developing regions. Local popula- tion support externalities are considered in the application below, but supraregional externalities are not. Development projects can also have other sig- nificant external costs and benefits that are very difficult to capture in terms of employment. In particular, environmental economists currently dedicate considerable effort toward devising ways to place a usefully accurate monetary value on national and global externalities, especially those that result from option and existence value. The validity of such accounting is controversial Har- ris, 1995; Costanza et al., 1997, and is perhaps even more problematic in terms of EBA. The accurate expression of such values in terms of jobs, job years, or population support would be extremely difficult. This may not, however, leave EBA much worse off in terms of its appropriate- ness as a method of project evaluation; the reality is that supraregional externalities are rarely con- sidered in policy implementation in developing regions. It is, of course, for this reason that the world’s tropical forests and other extremely globally valuable resources are disappearing at an alarming, and what is surely Pareto suboptimal, 9 I am indebted to an anonymous referee for raising this issue. One might argue that even if supraregional employment externalities are created, local employment should ‘count for more’ if, for example, the project results in considerable envi- ronmental protection. Such a consideration would implicitly involve distributional weighting, which was suggested in the context of CBA in developing regions by Little and Mirrlees 1974. Distributional weights, such that regional employment counts for more than supraregional employment, could be used explicitly, although doing so opens up the analysis to a much greater degree of subjectivity. This issue is discussed in the context of CBA in Kirkpatrick and Weiss 1996. 10 For both CBA and EBA, the choice of spatial level of analysis involves equity considerations because of aggregation. If analysis is at the regional level, subregional ‘winners and losers’ are lost through aggregation; if analysis is at the national level, then aggregation does not distinguish winners and losers at the regional level. See Pearce 1994 for a discussion of ‘sustainability requirement boundaries’. It would be appropriate for any EBA discussion to note at the outset what spatial perspective the analysis maintains. rate. 11 Perhaps the best perspective is to recognize that EBA is better at evaluating regional impacts of various projects, whose implementation is often in the name of sustainable development and envi- ronmental protection that almost certainly pro- vides positive net benefits at the supraregional level. Because of these potential weaknesses of EBA, it would be premature to abandon CBA as one methodology to be used in project evaluation, and the intention of this paper is not to suggest that EBA should be the sole means by which develop- ment projects are evaluated. Kirkpatrick and Weiss 1996 call for a ‘mixed team approach,’ pointing out that ‘‘…there will be certain types of projects which should be seen in terms of the achievement of a set of objectives, which cannot be converted readily into the monetary numeraire of conventional appraisals.…’’ By emphasizing employment, equity, and most importantly, sus- tainability over the maximization of monetary net benefits, EBA can be part of the cultural shift inherent in the ‘methodological pluralism’ that Norgaard 1989 argues is necessary for ecological economics.

4. An application