# Executive Summary

The World Bank's new Environment Strategy focuses on environmental programs that will improve the well-being of poor people in developing countries. The strategy advocates cost-effective reduction of air and water pollutants that are most harmful to human health. In addition, it addresses threats to the livelihood of over one billion people who live on fragile lands (i.e., lands that are steeply sloped, arid, or covered by natural forests).

The new approach will require accurate information about environmental threats to health and livelihood, as well as an appropriate resource-allocation strategy. Drawing on recent research at the World Bank and elsewhere, this paper attempts to contribute in three ways. First, we develop a rule for optimal cross-country resource allocation that reflects the Bank's investment policy. Using this rule, we estimate optimal country shares of Bank environmental investments from two sets of variables: threats from outdoor air pollution, water pollution and fragile lands; and estimates of the likelihood that Bank projects will succeed. We combine the country shares with Bank investment data to estimate optimal country allocations. Finally, we aggregate our country results to allocations for the major regions in which the Bank operates.

We find that the largest share of total optimal investment goes to East Asia (44%), followed by South Asia (21%) and Sub-Saharan Africa (19%). Other regions get significantly lower shares (respectively 6%, 5% and 5% for Latin America and the Caribbean, Eastern Europe and Central Asia, and North Africa and the Middle East). Within sectors, optimal investment patterns vary significantly. Sub-Saharan Africa gets a large allocation for safe water (34%), exceeded only by East Asia (38%), while South Asia gets 15%. Africa's allocation for cleaner air is strikingly lower (6%), in the same range as the lowest-investment regions, while East Asia (largely China) commands 50% and South Asia 24%. The allocation for natural resource management is close to the overall allocation, with East Asia receiving 44%, South Asia 24%, Sub-Saharan Africa 15%, and the other regions much lower shares.

It would be lucky indeed if the Bank's current investment allocation matched the optimal allocation, for several reasons: The Bank is pursuing a new strategy; we have just developed appropriate environmental threat indices; new measures of project success likelihood have just become available; and the Bank's Environment Department has recently completed its first comprehensive accounting of the Bank's environment portfolio. In a subsequent paper, we will compare our results with the Bank's current portfolio, and explore the implications for resource allocation. Future work may also extend the optimal investment approach to indoor air pollution and biodiversity conservation.

We recognize that the optimal investment approach cannot capture the full complexity of environmental decision-making in the Bank, and we do not claim that our results will provide a comprehensive blueprint for adjustment. Nevertheless we hope that they will make a useful contribution to the discussion of new environmental priorities.

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