Was Summers right in saying “pollute the LDCs”?

Back in 1991, Larry Summers upset a lot of people as Chief Economist at the World Bank.  His memo has been viewed as morally reprehensible, was cited in the second chapter of this book as indicative of the way economists ignore moral values, and was used as a key example in a philosophy class I sat in of the untenable nature of economic arguments.

But, as a description of what would happen if people in LDC’s (least developed countries) had the choice, was he actually correct?

Over the past 20 years, significant numbers of people have been moved out of absolute poverty by a strong push to industrialise in countries such as China.  By taking on these manufactured industries, there has been a change in the relative price of different types of goods and services – such that developed countries have focused on services (and New Zealand, as always, on agriculture – but with a climbing terms of trade).  In the same way the ‘centre of manufacturing’ has shifted towards developing Asia, so has pollution.

By ramping up manufacturing activity and pollution, these countries have effectively said “we think we were relatively under polluted (given the benefit of the output that occurs during the pollution process), as a result we’ve decided to switch to a situation with higher material standards of living and higher pollution.

By creating “import competition” (ht awesome post on the Economist) and having manufacturing output and ‘jobs’ go from the US to China, we are essentially going through the very process Summers was discussing – the process that he suggested would be in the LDC’s interest.  The “morally reprehensible” arguments of Summers actually represent the situation and what is favoured by groups within those countries.

Does this suggest that everyone has given Summers a bit of a hard time?

  • VMC

    I would not want to label all economists just based on what Summers thinks. Summers is a dick, most economists are not. What, you might ask, makes him a dick. Where to start? His thoughts on women, his shady financial dealing while at Harvard, his support for people of low character, and on and on. (I will leave it for economists to comment on his role in the financial disasters of 2008 etc).

    But to the issue of exporting toxic wastes to poor countries. He put forward three arguments, the first was that being poor people it was just cheaper if they died instead of people in rich countries.(“the foregone earnings from increased morbidity and mortality.”). Now Summers had choices – and he could have suggested exporting clean industries to poor countries, but choose not to do so. The fact that Asian countries have decided to industrialise, and increase pollution, etc is a completely different story (and a totally different issue) from another country ‘exporting’ its dirt to those countries. At its most basic the difference is that the countries get the benefits, not just the imposed costs. Therefore they can offset the costs of pollution.

    • http://tvhe.co.nz/ Matt Nolan

      Fundamentally, by “taking over manufacturing” of things that create pollution by making it at a lower cost these countries have engaged in exactly what Summers described – they have sold “no polluted” environment for the income associated with creating these goods and services. If we think this shift in manufacturing is due to the “import competition” that is widely described we can flip it on its head and act as if the trade was directly income for pollution as well!

      Summers may be a bad person, or a good person, I don’t know him. But given how much his suggestion that this could be welfare enhancing gets pillared, it is worth keeping in mind that, given the choice, this is exactly what a lot of LDC’s ended up doing …

      • VMC

        But, if its their choice then its up to them to make the tradeoffs and reap any benefits (along with the pollution). Its a very different matter if the World Bank imposes it on them. And, worth remembering that Asian countries have also taken over manufacturing of things that counter pollution like hybrid cars and solar panels. Also of interest, Summers memo focused on the so-called under pollution of poor countries not the under-income of them.

        • http://tvhe.co.nz/ Matt Nolan

          “But, if its their choice then its up to them to make the tradeoffs and reap any benefits (along with the pollution). Its a very different matter if the World Bank imposes it on them.”

          I agree with this completely – and for me this was the crux of my issue with the Summer’s memo, not the idea of trading in pollution. The philosophy class I noted above took a very different tack on the question ;)

          However, Summer’s could (and I suspect may at least implicitly – I have the memo at home so I can check tonight!) state that we get the same outcome in either case. If the market was being “blocked” then helping to facilitate the market outcome in this case is a good thing. Many people who critiqued the memo were fundamentally against the idea of trading pollution even with a market, due to the disparity of endowments of income!

          “Summers memo focused on the so-called under pollution of poor countries not the under-income of them.”

          Under pollution due to the potential for an income transfer – including the income transfer makes the question the same thing, but just with the attribute being discussed differing. It is a framing difference, not a difference in terms of the associated policy – if we are doing objective policy analysis the framing shouldn’t matter. What makes this interesting is that, for many policy analysts (and any of us thinking about policy) the framing IS very important for what they do.

          This is indeed interesting ;)

          • VMC

            To further complicate matters, I think I read somewhere that Summers said afterward that he was not serious when he wrote it, will be interested to see whether you think, after you have read it, does it read like he was having a laugh or what. And this is another of Summers problems – is he an analyst? or a politician? or an economist? or someone who likes to be important? It might be OK for us plebs to joke about macabre things but people is serious positions should not. And framing is always important in the real world, and I wonder if you might have bought into his framing when you say its not a difference in terms of policy? I dont think raising incomes automatically means more pollution. The history of the western world rather suggests that raising incomes reduces pollution. One part of the Kyoto agreement (for those who can recall such a thing) was that west would transfer non-polluting technology to the east so that they could bypass the ‘we have to pollute before we are rich enough to avoid pollution” argument. Did not work out however.

            • http://tvhe.co.nz/ Matt Nolan

              I found the memo here, turns out I have it with me – he notes that “production is mobile the consumption of pretty air is non-tradable”. In this way it does seem he is going a step further, saying there is essentially a negative externality on air pollution (it is like the flipside of a public good here), and as a result there is a market failure.

              In this way, air quality regulations in the developed world help to internalise that – and in so far as production shifts to the LDC’s, this is an externality essentially being dealt with, implying optimal trade in pollution!

              I’d also note that his whole argument is that the optimal outcome would involve more pollution in LDC’s – the full market failure is required to be specified before we can get the “right” policy conclusion (and he offers three different ones). However, from what we have seen in the last 20 years that arguments appears to be a correct one – but our discomfort stems from the fact he framed it in terms of trade in the ‘negatives’ rather than the perceived positives!

              Note: Just saw your new comment.

              The memo was an internal one discussing the logic they use at the World Bank for ALL policy decisions. I reads like he is trying to get people to think more carefully about policy in general, rather than actually trying to introduce policy – he doesn’t suggest actual functional policy in the memo.

              And to reinforce this, is was private and inhouse to World Bank staff – this was not written for public consumption, but got released. That changes the context a bit ;)

              • Seamus Hogan

                VMC and Matt:
                Two things: First, Summers did not write the memo. He agreed to have his name go on it. Second, as Matt said, it is very clearly a reductio ad absurdum not a policy advice. Anyone who says (as many did at the time) that Summers said that “we should be dumping pollution on poor countries”, simply hasn’t read the memo carefully. Everything in the memo is exactly correct use of the Kaldor compensation principle, and by extension cost-benefit analysis. To reject the memo is to reject cost-benefit analysis. That you might want to do, but if you do, you need to decide what it is about the KCP and CBA that is objectionable and consistently reject that aspect, not just reject the memo and carry on applying CBA in other contexts. This is the reductio the memo was getting at.

      • Kimble

        “His thoughts on women…”

        When people cite this it invalidates everything else they say. They are just letting everyone else know that they aren’t capable or willing to treat the man fairly.

        They are invariably referring to what should have been an uncontroversial statement in an adult discussion: that maybe the lower representation of one group of people in a specific field is due to differences in that group. When the innate differences between that group and the other group are observable, documented, explained, and have been the key to the survival of both groups throughout natural history, it is pathetic that the question that something else may be explained by the differences is deemed inappropriate.

        Economists aren’t unfeeling robots. They just look that way because everybody else acts like a stupid, quivering, gelatinous mound of irrational emotion and indignation.