|**Box 1. The Effect of Economywide Policies on the Environment: Findings from a Cross-Country**<br>**Study**|
|---|
|A recent World Bank report (1994a) investigating the waysinwhich economywide policies interact with<br>the environment drew the following conclusions:|
|_1. The removal of price distortions and the promotion of market incentives are generally good for both_<br>_economic growth and the environment._|
|_2. Economywide policy reforms may cause unintended side effects when other policy, market, or_<br>_institutional distortions persist._|
|_3. Economywide policies aimed at stability are generally good for the environment, because instability_<br>_undermines sustainable resource use._|
|_4. In the short run, economywide adjustment programs can have negative effects on the environment._|
|_5._<br>_Economywide policies are likely to have longer-lasting effects on the environment through_<br>_employment and income distribution changes._|

Policies favoring industrialization can have adverse effects on the environment unless measures are taken to protect the environment. This has been the case in Pakistan and, as further discussed later, industrial pollution is a serious problem in the country.

Freer international trade tends to increase investment in new technologies, which embody cleaner processes to meet higher environmental standards in countries to which Pakistan exports. This has not been significant so far, but is likely to become important in the future with trade liberalization and more vigorous implementation of the GATT's Uruguay Round agreements on sanitary and phytosanitary standards.<sup>2</sup> Exchange rate policies can affect the environment through the agricultural sector. Devaluation, for example, increases the prices of imported goods, and causes substitution away from imported products. In Pakistan, exchange rate devaluation led to higher prices for imported fertilizers and chemical inputs, which, together with changes in subsidy policies, led to changes in the pattern of input use. Making imports more expensive, however, could reduce access to the cleaner foreign technologies by making them more costly.

Policies aimed at reducing fiscal deficit balance can affect the environment through many direct and indirect channels. Spending cuts could also have both positive and negative effects on the environment. In Pakistan, the removal of some subsidies on energy provided financial incentives to increase the efficiency of energy use, and is generally beneficial to the environment. By contrast, cuts in spending on safety net programs for the poor will likely harm the environment, because consumption may be supplemented by increased exploitation of natural resources, including fish, rangeland, and forests.

Private sector development and policies aimed at privatizing government-owned industries may also affect the environment. During the early 1970s, many industries were nationalized in Pakistan. Nationalization was a disaster for the environment because it led to industrial

> **2** Environmentalists often argue that trade liberalization can lead to the displacement of domestic industries, as polluting industries move across international borders to regions in which environmental regulations are less stringent. Environmentalists also claim that more open market access and international trade may force countries to reduce their production costs by lowering environmental standards. These arguments are not tenable because gains from liberalization are generally significantly higher than the associated environmental costs, and environmental protection costs are minor determinants of comparative advantage.

5