CHAPTER 7 THE SPECIAL CIRCUMSTANCES

CHAPTER 7 THE SPECIAL CIRCUMSTANCES OF DEVELOPING COUNTRIES AND THE APPLICABILITY OF ECONOMIC INSTRUMENTS
Despite the increasing use of economic instruments by developing countries, their applicability to developing country conditions continues to be questioned by environmental groups, development
assistance agencies and developing countries themselves. Indeed, much of the technical assistance received by developing countries is skewed towards the use of command and control regulations. The conventional wisdom that economic instruments are of limited applicability to developing countries is based on the argument that their circumstances are radically different from those of developed countries and therefore developed country experience is of limited relevance. The increasing use of economic instruments by developing countries is often dismissed as experimentation by middleincome, newly industrialized economies that is of little relevance to low-income agrarian economies.
The objectives of this chapter are to examine the special circumstances of developing countries that might affect the applicability of economic instruments, either positively or negatively, and to assess the applicability of particular instruments to particular circumstances, especially those of low-income countries.
By definition, developing countries differ from developed countries by their level or stage of
development, as measured by income per capita. This definition of development is by itself
unsatisfactory for inter-country comparison, even in the narrow economic sense. Converting income per capita into purchasing power parity alters significantly the “development” ranking of countries. Further adjustments need to be made for differences in quality of life indicators such as child mortality,life expectancy, literacy, etc., which are not always correlated with income. These adjustments result in further changes in the “development” ranking of countries (see for example UNDP's Human Development Index). Even then, resource depletion and environmental degradation are not accounted for and hence the “development ranking,” even after the purchasing power and quality of life adjustments, is biased against countries that practice resource conservation and environmental protection.
With these caveats in mind, but without a more widely accepted and understood alternative, we use the conventional definition of developing countries as the non-OECD countries, excluding the
transitional economies of Eastern Europe and the former Soviet Union and the high-income oilexporting countries such as Brunei, Kuwait, Saudi Arabia, and the Gulf States. This definition still leaves more than 120 countries ranging from the tiny Pacific Islands to China. The ecological, cultural, and political diversity is at least as wide as the differences in size and geography. Therefore, the special circumstances describe below are generalizations that apply more to some countries than others, but do constitute distinguishing features of developing countries as a group, from the OECD
countries taken also as a group. However, since developing countries are far from a homogeneous
group, a further classification into low- and middle-income countries is appropriate. The latter group is defined to include the newly industrializing economies. Correspondingly, the special features of developing countries discussed below apply par excellence to low-income countries and to a lesser degree, to middle-income countries.
Development Priorities Growth and Distribution
Economic development and poverty alleviation are the top priorities of developing countries, while maintenance of prosperity and of quality of life, through economic stability and environmental protection, is the primary concern of developed countries. A 2% to 3% growth rate, considered an accomplishment among OECD countries, is lamented as a failure among developing economies, which, given 2% to 3% population growth must grow at least that fast to stand still at what is a very unsatisfactory standard of living. Growth rates of 5% to 10% are aspired to by all developing countries but achieved by only a few. Yet high growth rates remain a priority even for those developing countries that are experiencing stagnation or even economic decline (e.g., sub-Saharan Africa), perhaps more so; hence they are unlikely to give high priority to environmental protection unless it is seen as an effective means of escaping stagnation and of achieving high rates of economic growth. This has significant implications for the applicability of economic instruments in general and for the right choice of instruments in particular. First, instruments with applications to natural resource management are of special interest to low-income resource-based economies while instruments of industrial pollution control are of particular interest to newly industrializing countries. Second, the effect of the instrument on economic growth is of primary concern. Instruments that restrict or constrain economic growth conflict with developing country priorities. The instrument must achieve its purpose at the lowest cost possible, and whatever that cost is, it must not be such as to adversely affect the competitiveness of the country's exports as a whole, even if particular exports might be affected.