Rationalizing the trade regime and liberalizing external payments increases economy efficiency, speeds up economic growth, and reduces poverty. It is also likely to provide incentives for better natural resource management. These reforms have encouraged production of products in which Pakistan has a comparative advantage, such as cotton yarns and threads, textiles, and leather products. Although in some cases additional policies may be required to ensure that growth in these sectors does not cause additional pollution, for the most part trade policy in Pakistan has benefited the environment.

Focusing only on win-win policies will not ensure sustainable resource use. An economy in which resources are allocated efficiently is a necessary not a sufficient condition for creating appropriate environmental incentives. Environment-specific policies will be needed to ensure sustainable economic development.

# _Targeted Policies Directed at Improving the Environment_

As mentioned above, win-win economic policies are necessary but not sufficient to achieve sustainable development. In many cases, targeted environmental policies are required and justified, often to cope with market failures that cause externalities and overexploitation of the natural resource base. This argument is supported by a recent study of economic reforms and the environment in Pakistan (AERC 1995), which developed economic models (both at the macro and sectoral level) in which levels of key economic variables were linked to indicators of resource degradation and pollution. The study showed that economic reforms reduce the number of people exposed to environmental risks associated with unsafe drinking water and inadequate sanitation, but increases urban population and the generation of municipal waste. Economic reforms also increase aggregate emissions of air pollution. The study argued that unless corrective measures are taken, the income, water, and sanitation benefits of economic reforms will be offset by environmental degradation related to congestion, solid waste, and air pollution.

Two types of targeted policy can be used-command and control, and incentive- or market-based policies. Within these two categories, policies can be either direct or indirect. Command and control policies involve government mandating of environmental quality standards on emissions, technology type, or input use. Incentive-based policies use prices to try to affect pollution and resource use.

Market-based approaches to regulations that mandate the behavior of decision-makers are preferable to regulatory approaches, because policies that use economic incentives are often less costly. Taxing industrial emissions, for example, provides an incentive for firms to invest in cleaner technologies and gives firms with lower pollution abatement costs an advantage over firms with higher pollution control costs. Regulations leave these decisions to the regulators, who are rarely informed about relative costs and benefits in industry. Moreover, market-based policies that price environmental damage affect all polluters, in contrast to regulations, which affect only those firms that comply. Market-based policies send the right long-term signals to resource users, and provide polluters with an incentive to use technologies that are most cost effective at reducing environmental damage. Regulations that mandate standards give polluters no incentive to go beyond the regulated standard. Regulations also require monitoring and enforcement, and governments must be prepared to prosecute violators. In many developing countries, including Pakistan, the necessary monitoring and enforcement capability is weak.

8