# **_Incentive Policies and Institutionsfor Improving the Environment in Pakistan_**

As noted, non-distortionary economic policies that stimulate economic growth by improving the allocation of resources generally create appropriate incentives for the protection of the environment. Such policies are referred to as 'win-win" policies in that economic and environmental objectives are jointly achieved with the use of the same policy instruments. Policies for sustained development thus can build on the positive links between development and the environment.

# **_Economic Policies That Create Incentivesfor Improving the Environment_**

The scope for policy reforms that promote income growth, poverty alleviation, and environmental improvement is very large in Pakistan. Since the 1980s and particularly in recent years, Pakistan has carried out significant structural reform of the economy. Such reforms aim at altering the organization of the economy in order to achieve greater efficiency and economnic growth, largely by moving toward a more open, market-orientated economy (World Bank 1<sup>9</sup> 95a). By providing economic agents with incentives to manage the natural resource base in ways that are more sustainable, market-orientated policies have generally had positive effects on the environment. These win-win policies-particularly the deregulation of prices, the privatization of State-owned enterprises, and trade reform-should be supported and strengthened.

The structural adjustment program eliminated many agricultural price subsidies. The subsidy on agricultural chemicals was removed, for example, and the subsidy on fertilizers is now very small. As a result, the markets for chemicals and fertilizers have become more efficient, private sector involvement in the production and distribution of these agricultural inputs has increased. At the same time, farmers face incentives to use less of these inputs, which in turn has led to slower rates of pollution resulting from less agricultural run-off into the groundwater aquifers (see section III).

Opportunities for other win-win price policies remain unexploited. Irrigation water charges do not cover the operation and maintenance of providing service, and farmers thus receive large subsidies on water. The cheap water has provided incentives for farmers to over irrigate, leading to water wastage and severe soil degradation as a result of the leaching of nutrients from the soil. The pricing of energy is another area in which win-win opportunities are being missed. Electricity prices charged for residential users remain below the long-run marginal cost, and agricultural users pay a flat tariff instead of being charged on the basis of use. Subsidies also remain in the gas sector, with residential users and some industrial users paying significantly less than production costs (World Bank 1995b).

Privatization is also a win-win policy because it can help reduce fiscal deficits-especially if proceeds from privatization are used to reduce the government debt-and it leads to more efficient use of inputs and to the introduction of new technologies that are generally cleaner than the old ones. Private firms must be required to comply with pollution control laws and regulations; the extent to which privatization benefits the environment thus depends on the government's monitoring and enforcement capacity. Although these capabilities are weak in Pakistan, private firms can nevertheless be encouraged to employ environment-friendly production practices through the use of market-based incentives, such as the proposed pollution tax, or through other forms of control, such as pressure from NGOs.

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