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<text> <title> The Greening of Eastern Europe </title> <article> <hdr> Global Affairs, Spring 1992 The Greening of Eastern Europe </hdr> <body> James M. Sheehan--research associate at The Competitive Enterprise Institute in Washington, D.C. The unvarnished truth about Eastern Europe's disastrous condition--both economically and ecologically--is fast becoming conventional wisdom. What once was the breadbasket of Europe is now its basket case. The degradation of the Eastern European environment is arguably the most advanced of anywhere on the globe; indeed, the revolutions against totalitarianism included "green" organizations dismayed over the potential health effects of a deteriorating environment. Setting an increasingly hyperbolic tone, the national assembly of the Yugoslav republic of Montenegro proclaimed itself the world's first "ecological state" in September 1991. (Radio Free Europe/Radio Liberty, Daily Report, September 26, 1991, p.6.) A group of citizens in Bulgaria threatened not so long ago to seek "ecological asylum" in other countries. As the new governments of Eastern Europe stabilize politically, they will have to clean up the contaminants inherited from former communist regimes and modernize the incredibly inefficient and polluting industrial infrastructure. Initial estimates of the costs of environmental cleanup for the region range into the hundreds of billions of dollars. Cleanup of the Danube River alone may cost $10 billion, according to World Bank environmental specialist Stephen Lintner. These enormous sums have led many in the West to argue the necessity of massive infusions of state-to-state aid. But a number of misconceptions about the fragile process of transition threaten to cause such foreign aid to be misappropriated for a kind of Potemkin environmentalism: all facade, and no solid foundations. Myths About Foreign Aid to Eastern Europe Foreign aid officials in the West are currently providing extensive guidance to the newly democratizing Eastern European governments in an effort to insure that their emerging market- oriented economies will contain sufficient safeguards for the ecology. Foreign aid programs administered by U.S. officials include numerous provisions designed to encourage the enactment of strict environmental standards and regulations. America's answer to the environmental damage of socialism, surprisingly, is a re-institutionalization of bureaucratic state control. Or perhaps it is not so surprising, when one considers the bureaucratic culture of those formulating the policy. As new commercial codes and regulations are drawn up by Eastern European parliaments, U.S. officials are urging them to constrain economic growth for environmentally "sustainable development" and to establish vast social welfare safety nets to handle the unavoidable economic displacements that result. Yet if four decades of Eastern European history demonstrate anything, it is that nothing can be worse for the environment than central planning. An economy cannot run effectively with control from the center. Similarly, an ecological protection plan cannot operate effectively if it is dependent on the decisions and actions of diverse and generally autonomous (and irresponsible) bureaucracies. The prevailing theme of the recent revolutions against communism holds that free markets based in sound property rights offer the best prospects for both the economy and the environment. However, these economic and environmental values in Eastern Europe are threatened by a veritable honor roll of myths inspiring American efforts to support the transition to market economies--half-truths invoked in order to justify continued and massive government interference. Myth 1: Western assistance for the environmental cleanup of Eastern Europe will create an enormous new market that will reignite the regional economy. Fact: The environmental cleanup of Eastern Europe will have little positive impact on the economies of that region insofar as the cleanup is directed by government authorities. The money spent on the cleanup will be redistributed wealth--whether provided externally or from within. No wealth is created by this vast "new" market. To the contrary, the damage to the environment is a systemic result of limitations on economic efficiency through command and control. For any effective cleanup of the region, it is critical that resources be allocated efficiently. These crippled economies have nothing to spare. Much of the funding for the proposed aid effort will come from the U.S. and the European Community, either in the form of direct assistance or taxpayer-subsidized loan guarantees. That money, in turn, will be directed toward firms with proven experience in cleanup technology, giving western corporations a decided advantage. For the West, government assistance justified for Eastern Europe winds up as a state subsidy benefiting western cleanup technology firms, whose need of such assistance is questionable. In the East, countries will be saddled with increasing debt which they are unlikely to be able to pay back. In addition, there will be little incentive for indigenous innovation: western aid will undercut local prices, competitiveness, and initiative. Myth 2: The enactment of stringent environmental laws is necessary to develop the overall perception of "social progress" in Eastern Europe's transformation. Fact: Depressed economies are the predictable result of slow growth policies, and they will more likely perpetuate a perception of stagnation and decline. If western firms are to clean up Eastern European contaminants, a dependence on the West will result. No indigenous industries will be able to compete with the more advanced, subsidized western firms. The dependence of an entire region on the West would be a detriment, not an advantage--both in reality and perception. Stringent environmental regulations would also choke off foreign investment that is not subsidized. Sound, calculated investments, made for their potential to realize profits, are the only type that can sustain wealth and job creation in the long term. Historically, government transfers have tended to become institutionalized and to claim an ever-increasing share of a nation's resources. Myth 3: Eastern European governments must coordinate national industrial policies and control foreign investment to ensure that environmental concerns are taken into account. Fact: In the previous communist regimes, trade protectionism was a chief culprit of environmental destruction. In keeping out western industry, indigenous technology was protected from competition. Antiquated, environment-polluting technology was thus preserved in its most destructive form, with no incentive for innovation. The often-repeated argument runs that capitalism will export its pollutants to Eastern Europe, where regulations are more lax. But in truth, a reduction in trade barriers like tariffs, quotas, and foreign investment taxes predictably would diminish pollution by accelerating the phaseout of inefficient technologies and encouraging the transfer of needed managerial expertise. Myth 4: A global environmental strategy would first direct funds to regions in greatest crisis, namely Eastern Europe. Fact: This is analogous to saying that all social programs would be more effective if funds were transferred to only the poorest of the poor. It ignores the role of incentives in cleaning up the environment. If individuals are allowed to own resources, these assets will directly benefit from wise management practices. By focusing responsibility for resource management on governments, environmental foreign aid lessens the urgency of meaningful economic reforms and fails to generate the competitive pressures to adopt cleaner technologies. The perverse set of incentives that it introduces winds up punishing innovative approaches to resource management. If Eastern Europe's ecology has indeed reached crisis proportions, then a system based on a broad distribution of property rights would be much more effective than "emergency" cash infusions to government bureaucracies. Property rights vest the owners of resources with an economic interest in preserving their value, which is reflected in the market price at which they can be purchased or sold. To maximize that price, owners are encouraged to invest in energy-saving innovations and to practice environmentally-sound resource management. Ownership confers specific stewardship responsibilities on the individual, a critical component sorely lacking in collectivist, bureaucratic systems. For that reason, privatization is the most efficient way to achieve environmental protection. Myth 5: Institutional strengthening of government agencies and environmental organizations will protect the environment by fostering public awareness and concern about pollution. Fact: This strategy simply feeds the interest group frenzy that hinders true environmental progress. The most crafty and effective groups in the political arena will win such a game; concurrently, the environment--and the people--will lose. Considering the economic plight suffered by all of the countries in transition, it is unlikely that political factors will permit the closing of polluting factories that have employed thousands of workers, and this situation is likely to persist for many years. It must be recognized that Eastern European governments are still dominated by opportunistic lifetime bureaucrats. Before providing them with money and expertise to continue their domination of their nations' economic systems, western assistance should as a matter of absolute priority promote development of the private sector. A free-market strategy would provide built-in incentives for pollution prevention, spread out over the entire economy, not just calibrated to narrow interests. Myth 6: A western-style government regulatory bureaucracy must be used to protect the environment from unrestrained capitalism. Fact: Centrally-planned economies in Eastern Europe had very strict environmental laws--on paper. These laws were unenforceable because they distorted the prices of natural resources; therefore, such resources were not distributed according to their true value to society. Capitalism, unrestrained or otherwise, has done a superior job of protecting the environment--always has, always will. The western model for government involvement in environmental protection will, in any case, not transfer smoothly to the former Eastern bloc. Western policies depend on bureaucrats with technical expertise, on public participation, on a transparent decision-making process, and on vast sums of money collected from a vibrant underlying economy. None of these conditions currently prevails in Eastern Europe. The Impact of U.S. Foreign Aid As the new governments of Eastern Europe grapple with former communists and secret police agents in the bureaucratic nomenklatura, misguided advice could have security and stability implications for the still volatile political systems of the region. Observers of the political scene report the growing influence in ecological ranks of "watermelons"--green-on-the-outside, red-on-the-inside former communists who seek havens in environmental bureaucracies. Exploiting concerns about the environment to justify expansion of state power, former communists and entrenched bureaucrats could easily foil current efforts to restore land ownership to former holders, provide legal restitution for past confiscations, and establish full legal property rights. Several agencies and organizations either run by the U.S. government or funded by U.S. taxpayer dollars now give just the sort of environmental foreign aid that is most likely to imperil Eastern Europe's smooth transition to a market economy. The Agency for International Development (AID). The federal government appropriated $75 million in 1991 for Eastern European environmental and energy programs of the Agency for International Development. Besides suffering from the pitfalls of each of the myths regarding environmental cleanup, AID's programs aspire more to administering outmoded socialist vehicles of environmental protection than to developing free-market economies. Although AID officials do admit that an evolution of the trade relationship between East and West will provide the technology transfers necessary for environmental cleanup, free trade is nowhere on their agenda. The Capital Development Initiative, an AID collaborative effort with the Department of Commerce, subsidizes small-and medium-sized American private investment and marketing projects. (Agency for International Development, Environment and Natural Resources Bureau for Europe, Program Summary, "Current Programs/Projects in Central and Eastern Europe," (Report No. 1); American Business and Private Sector Development Initiative for Eastern Europe Proposal (No. 180-0028), September 3, 1991, p.8.) It also handles government contracting for environmental, energy, and infrastructure projects. The Department of Commerce boasts that this initiative can develop trade in areas of U.S. comparative advantage. Although it may indeed assist certain technologically advanced American businesses, it also contributes to Eastern European trade deficits by frustrating local efforts to develop competitive industries. As if intended to entrench Eastern European noncompetitiveness, AID's environmental sector grant to Czechoslovakia provides it with $15 million to purchase American products, ostensibly to ease Czechoslovakia's balance-of-payments difficulties. Subsidized trade and investment programs as they are now structured will serve to make Eastern Europe dependent on western assistance for its environmental policy. Funds will be merely steered toward established western firms in cleanup technology, and diminish the likelihood that Eastern European firms will ever become competitive. In this way, American managed-trade will replace the Soviet Union as the superpower dominating Eastern European commerce. Market forces, which would provide the stimulus for both indigenous and foreign private investment, will be sacrificed to a blatantly mercantilist effort to challenge the European Community for shares of the vast new Eastern European market. Not only do these AID programs contain needless subsidies to American businesses, their effectiveness is jeopardized by a bureaucratic duplication of effort--motivated more by U.S. bureaucratic turf considerations than by any legitimate concern for Eastern Europe's environment. AID shares the responsibility of institution-building and environmental management training through an $8.1 million "interagency agreement" with the Environmental Protection Agency. AID also monitors a transfer of funds to the Department of Agriculture for soil conservation, integrated pest management, and agro-pollution workshops in Poland and Hungary. AID cooperates in a program with the Department of Energy to retrofit Polish coal-fired power plants with cleaner technology. In December 1990, the U.S. Army Corps of Engineers participated in a wastewater treatment project in Krakow, Poland. AID even proffers technical advice on parks development through an arrangement with the National Park Service. (Information derived from Agency for International Development, "Current Programs/Projects in Central and Eastern Europe," (Report No. 1), op. cit.; U.S. Environmental Protection Agency, Report to Congress, "Environmental Conditions in Poland and Hungary," March 1991; and Agency for International Development, "Report on FY 1990 Actions Mandated Under the SEED Act of 1989," April 1991, p.22.) Project duplication is so severe that one World Bank official recently remarked that he routinely sees more western advisors in Eastern Europe than local environmental officials. Leaving aside AID's deplorably wasteful style in delivering its services, its use of a recognizably bureaucratic command-and-control model for the region's environmental protection runs sharply counter to the prevailing desire for decentralization and privatization. This model emphasizes multilateral strategic planning systems, integrated administrative/management enforcement infrastructures, and regionalized rather than localized priority-setting--all characterized by a disdain for economic growth. Decentralized management is only acceptable in the context of national minimum standards. The mode's preference for centralization frontally threatens the viability of the region's critical economic reforms. One key component of AID's budget is allocated to the strengthening of regional nongovernmental organizations (NGOs), indigenous environmental special interest groups often-times collaborating with European green parties and American environmentalist groups. To strengthen these interest groups, AID advises that they receive government subsidies to assure them of greater political clout in the environmental policy reform process. To set an example, AID has provided grants to western interest groups--the World Wildlife Fund, for example--to conduct workshops, fact-finding study tours, conferences, and training sessions for interest groups and government officials. One of the World Wildlife Fund's mandates for such programs is to cultivate "domestic U.S. understanding of and support for Central and Eastern Europe environmental concerns." AID financially supports the Environmental Law Institute in providing law-drafting and standard-setting advice, and in developing litigation strategies to further empower environmental interest groups. Institution-building and institution-strengthening entail abundant, publicly-funded investigations and consultations among interest groups and government offices. Institution-strengthening is severely short-sighted in that it fails to integrate environmental policy with the rest of the reform process, and indeed subsidizes a kind of in-house competition. Privatization and marketization of the economies will be enormously more difficult when NGOs and environmental ministries are given excessive power to pursue their parochial interests. Without free-market economies, environmental resources will be controlled by bureaucratic managers more committed to ballooning agency budgets than to environmental solutions. A serious shortcoming of the institutional strengthening approach is its failure to anticipate the NGOs themselves becoming private resource managers. Instead, NGOs are being trained to support and provide justification for a permanent government bureaucracy. The Environmental Protection Agency (EPA). A U.S. Environmental Protection Agency report submitted to Congress in March 1991 urges that U.S. foreign aid be used to encourage what it calls "sustainable development." (U.S. Environmental Protection Agency, "Environmental Conditions in Poland and Hungary," op. cit., especially Chapter 1: "The Dilemma of Sustainable Development"; also U.S. EPA, Eastern European Programs Summary, September 17, 1991.) This refers to slow, managed growth carefully coordinated by government to balance environmental and economic considerations. The Mazurian Lakes district in Poland was an early EPA target for sustainable development policies. Poland's Ministry for Environmental Protection explains the implications of sustainable development goals in its national environmental policy: "Activities undertaken to support sustainable development will promote credits, transfer of technology, and reduction of debts" and "enable easier access to foreign aid for environment projects." (U.S. Environmental Protection Agency, Report to Congress, "Environmental Conditions in Poland and Hungary," March 1991, Appendix B: "National Environmental Policy," Polish Ministry of Environmental Policy," Polish Ministry of Environmental Protection, Natural Resources, and Forestry, dated November 1990.) In plain words, experts from the EPA have implied that more development assistance will be forthcoming if Poland adopts stringent command-and-control environmental standards and regulations. Many Poles, as well as other Eastern Europeans, are painfully aware that central economic management was the cause of the region's severe environmental damage in the first place. Czechoslovakia's Finance Minister, Vaclav Klaus, was recently quoted as saying, "We are not interested in the market socialism dreams of the leftist liberal economists on the East Coast of the United States. Right now, the main obstacle to our development is ideological infiltration from the West." (Quoted in National Review, December 16, 1991, p.8.) EPA's reassurances that government can competently manage slow growth policies do little to allay Eastern European suspicions. Socialist economic resource managers, undisciplined by prices reelective of ownership, could never accurately predict the needs of consumers; shortages and gluts were the inevitable results. Economic planners achieved neither a healthy economy nor a clean environment, even with the most ambitious government coordination effort ever attempted. Eastern Europeans know from decades of experience that communist environmental laws, though strict, did not contain incentives for compliance. Consequently, labor was unproductive, resources were squandered, and state-run industries polluted on a wide scale. Czechoslovak President Vaclav Havel has said, "Whole sectors of industry are producing things in which no one is interested while things we need are in short supply.... Our outdated economy is squandering energy.... We have the worst environment in all of Europe today." (Quoted in Richard Ackerman, "Environment in Eastern Europe: Despair or Hope?" (unpublished), World Bank, 1991.) Undaunted, the EPA report, required by Congress under the 1989 Support for East European Democracy Act (SEED), advises that environmentally sound management requires national industrial policies, national transportation strategies, and national energy policies. The ideal industrial policy would manage energy conservation and environmentally-conscious business development. A system of broad-based taxes would be necessary, including a surtax on hydrocarbon fuels, leaded gasoline, toxic materials, and electric power utilities. Before being approved, all economic development would be subject to rigorous environmental assessment procedures. A transportation policy would coordinate stringent fuel taxes and massive government-run public transportation systems. A national energy strategy would centrally plan energy needs in the areas of transportation, fuel consumption, power generation and transmission, as well as environmental costs. To bring about these national policies, EPA advocates the administration of foreign aid for "strengthening environmental agencies at the national, state or county, and local levels." Pursuant to that appraisal, EPA sponsors environmental policy and management workshops, technical and managerial training sessions, and study tours for environmental specialists. In cooperation with the European Community, EPA participated in the September 1990 opening of the Regional Environmental Center in Budapest. This facility has disbursed much of its $15 million in funding to local environmental groups through environmental education programs, information clearinghouse activities, and grant-making procedures. The purpose of these institution-building programs, according to an EPA program summary, is "to integrate environmental considerations in the privatization process." The resulting hostile regulatory atmosphere generated by U.S.-backed intervention is likely to stifle foreign investment, which is essential for the transfer of efficient western technology and industrial expertise. It promises to hamstring newly privatized enterprises which are rapidly adjusting to new commercial codes, taxes, and legislation. Foreign aid, to be effective, must necessarily foster a strong private economy in each Eastern European country. A strong economy will in turn attract billions of dollars in private investment and generate the wealth needed to promote growth--and to clean up the environment. The Overseas Private Investment Corp. (OPIC). The Overseas Private Investment Corporation, a U.S. government agency, is the prime example of a destructive foreign aid program masked by a private enterprise veneer. OPIC's Eastern European programs provide American investors substantial financial assistance through debt securities and co-financing arrangements. OPIC also provides political risk insurance--a full guarantee of assets and income--against losses incurred due to civil strife or expropriation. A new OPIC program, the Environmental Investment Fund, is designed to provide capital and financing for investment supporting "environmentally responsible business development." (Overseas Private Investment Corporation, Special Report: OPIC in Central and Eastern Europe, Winter 1991.) At an especially inopportune moment for Eastern European reforms, all OPIC-sponsored investments are rigorously scrutinized for their conformity to international ecological standards as set forth in the International Chamber of Commerce's "Business Charter for Sustainable Development." As defined by the charter, sustainable development policy authorizes governments to "coordinate" business development in order to "properly balance" economic and environmental considerations. Under these standards, only an ecologically-managed society can assure that resources are equitably administered--reminiscent of Marx's labor theory of value in that resource pricing is determined by a standard unrelated to supply and demand. This Business Charter favors massive government control of resources, with "legal regulations as the starting point," and aims to "apply the same environmental criteria internationally." These guidelines urge strict, precautionary ecological assessment standards for all business development. It calls for a coordinated government effort to bring about the modification of all existing manufacturing, marketing, and facility operation practices, and to integrate uniform procedures "fully into each business." To encourage such ecological bureaucratization, OPIC-related programs in 1990 supported more than $230 million in investment in Eastern Europe for projects in agribusiness and manufacturing. OPIC's Environmental Investment Fund has targeted "investment" in several broad categories, including alternative energy industries, agribusiness, eco-tourism, and forestry management. The fund's opening equity capitalization is projected to be $60 million, coupled with the issuance of $40 million in debt. Its prospectus boasts that this debt is fully guaranteed by OPIC, "and thus backed by the full faith and credit of the United States." In other words, if a business venture fails--maybe because of ecological "purism"--the U.S. taxpayer will bail it out. Known officially as Biosphere Partners, the fund directly benefits such champions of private enterprise as Kidder-Peabody, a prominent investment bank, and Booz-Allen, Hamilton, a prestigious management consulting firm. Biosphere Partners clearly is designed to invest in projects that would never come to fruition without a guarantee of profit from Uncle Sam. Since a government agency selects the winners and losers, investment planning inevitably represses the competitive innovations essential for indigenous economic growth. As with other subsidies, it also encourages unwise investment. In 1990, for instance, OPIC backed Hyatt International Corporation's project to build a Hyatt Regency Hotel in Belgrade, Yugoslavia. If the hotel were to become damaged or destroyed in Yugoslavia's civil war--indeed, however Greater Serbian impulses evolve--the U.S. must cover the loss. If Hyatt had not been subsidized, Yugoslavia's instability might have been factored differently into the investment equation. The International Bank for Reconstruction and Development (The World Bank). The World Bank, a multilateral development assistance organization with 18 percent of its $23 billion in funds contributed by the United States, has a grievous history of supporting government bureaucracies and wasteful construction projects at the expense of environmental considerations. For example, its 1987 energy sector program for Brazil financed the construction of the $500 million Balbina Hydroelectric Dam on the Uatuma River. As a result, floodwaters forced one-third of the Waimiri Atroari indians off their land and exacted significant human and environmental costs. The World Bank's current environmental assistance initiatives exhibit little improvement; they will surely jeopardize Eastern Europe's economic reforms even as they harm the ecology. The Bank's proposed regional energy sector program was developed by western experts in conjunction with Eastern European environmentalists and bureaucratic holdovers at the national and local levels. The strategy to promote austere economic management calls for raising energy prices and stiffening regulations on effluent and emissions. It also advises the adoption of strict environmental assessment guidelines regulating economic development. (World Bank, World Bank and the Environment, A Progress Report, 1991, pp. 47-52) Ironically, World Bank analyses correctly identify the chief culprits of environmental degradation for the last several decades--governments that controlled excessive portions of their economies. Leftover price and market distortions, subsidies, and government ownership preclude the efficient distribution of environmental resources. Only the adoption of accurate prices and privatization will provide the incentive to seek out efficient and environmentally-sound alternatives to the primitive, dirty technologies now in use. For example, the extensive state-industry use of subsidized, high-sulfur "brown" coal will be phased out because it will no longer be sold for less than its cost of extraction. As a consequence, sulfur emissions into the atmosphere linked to acid rain will gradually disappear. Inexplicably though, the World Bank continues to advise significant interference in the economy, believing that coordination with Bank experts will somehow produce appropriate energy demand and calculate accurate prices. Beyond the natural price increases caused by a removal of subsidies, the Bank urges the lifting of prices above even market valuations. Bank research teams in Czechoslovakia and Poland actually concluded that future loan and financial assistance projects should actively increase prices in the energy sector. A Bank study for Hungary recommends "more effective demand management and economic pricing." (World Bank, World Bank and the Environment, A Progress Report, 1991, p.51.) Strategies for the region call for investments in massive industrial restructuring, requiring extensive government subsidies and public spending projects calculated to prevent prices from reflecting their true scarcity value. Industrial pollution controls and environmental impact assessments recommended by the Bank also compel substantial market distortion. The European Bank for Reconstruction and Development (EBRD). In fiscal 1991, the U.S. government appropriated $70 million to the European Bank for Reconstruction and Development, a $13 billion multilateral investment bank for Eastern Europe. The United States is the single largest shareholder in the EBRD, and is committed to providing 10 percent of its capital stock. As a private sector development institution, EBRD has not focused specifically on broader environmental sector goals. At least 60 percent of EBRD's lending portfolio must encompass private sector investment, leaving the remainder for direct state use. Although its first loan projects have only recently been approved, it is clear that the EBRD, unlike U.S. bilateral foreign aid, is targeted more toward private sector development. Nevertheless, the EBRD Articles of Agreement incorporate several provisions for environmental protection which were required by European Community officials, to "promote in the full range of its activities environmentally sound and sustainable development." (David Reed, The European Bank for Reconstruction and Development: An Environmental Opportunity, World Wildlife Fund, October 1990, p.11.) One provision requires the EBRD to prepare annual reports on the environmental impact of its lending operations. Several special-interest organizations, including the World Wildlife Fund, Friends of the Earth, and the Center for International Environmental Law, have pushed for strict environmental assessment procedures governing EBRD projects, the effect of which will be to dilute even the most constructive aspects of its investment portfolio. Rigid EBRD environmental guidelines could potentially be used to pressure recipient governments to adopt legislative and regulatory environmental control mechanisms as a precondition for economic assistance. The Prospect of Perpetual Development Assistance The net effect of multilateral and bilateral development assistance aimed at Eastern Europe's environment will be to bestow economic benefits on U.S. foreign aid officials, whose prerogatives would expand with increased financial commitments from the U.S. government. Environmental assistance is designed to continue U.S. government involvement well into the next century in the form of workshops, training sessions, consultations, and studies--all undertaken for the purpose of developing annual and multiyear workplans. If the U.S. has its way, the infamous five-year plans of socialism will return soon under American auspices. The purpose of such plans is less to facilitate environmental recovery than to perpetuate bureaucratic relevance. One indicative World Bank project in Warsaw, for example, furnished an $18 million loan to implement the Environment Management Project, a principal function of which is to devise long-term environmental strategies to be underwritten by the West and to "provide a framework to coordinate offers of assistance from overseas." (World Bank and the Environment, A Progress Report, 1991, op. cit. p.52.) In one suggestive December 1990 article in the World Bank magazine, Finance and Development, an architect of the Bank's Eastern European program contends that Eastern Europe's advancement to self-sufficiency "could well last a decade or more." World Bank and the Environment, a progress report on environmental assistance for the latest fiscal year, claims that "significant improvements (in the environment) are possible in the short-to-medium term." Yet, the same report indicates that only in later phases "will it be possible to invest in the kind of modern, clean technologies that promise substantial gains in productivity and a cleaner environment." Significant improvement leading to self-sufficiency is clearly not intended. Speculation as to the duration of "short" and "long" terms is carefully avoided. America's environmental development planners are conscious of the drastic economic repercussions associated with their sustainable development strategies. They anticipate related displacements to be so severe that comprehensive social safety- net programs must be expanded to accommodate the overflow. In conjunction with its other recommendations, the EPA's report to Congress suggests "programs of unemployment compensation and other income support, worker retraining, and entrepreneurship assistance--to bridge the personal and social costs." (Emphasis added.) The World Bank also recommends large social safety nets as part of its macro-economic adjustment programs. The resurgence of ex-communists in bureaucratic centers of power would provide a favorable setting for future requests for foreign aid. A morass of debilitating long-term indebtedness is expected to accompany ineffectual, environmentally-focused foreign loans. In 1990, the World Bank alone loaned $1.8 billion to Poland, Hungary, and Yugoslavia, an increase of more than one billion from the previous year. Over the following three years, the World Bank expects to "lend" nearly $9 billion on top of debts amassed by previous communist regimes. (Agency for International Development, "Report on FY1990 Actions Mandated Under the SEED Act of 1989," op. cit.) If U.S. and other agencies are successful in achieving bureaucratic control of environmental resources, incentives for their careful stewardship will wither just as they did under communism. Simultaneously, ongoing economic reforms necessary for the acquisition of environmental cleanup technologies will be derailed. Continued stagnation will undoubtedly give rise to urgent calls for more aid, more loans, and more investments. Eastern Europe's dream of achieving economic self-sufficiency and integration with the new Europe will be hopelessly delayed. The Solution for the Environment: Free Markets Rather than allowing bureaucrats to control the environmental and economic agendas, the emerging governments of Eastern Europe should pursue--and should be encouraged to pursue--a free market agenda: -- the establishment of constitutionally-enforceable property rights and private contract rights; -- accurate, market-based pricing of natural resources, free from government distortions; -- an infrastructure to handle mediation of private contractual disputes; and -- privatization, or "Ecological Homesteading," of collectively-owned resources. When European settlers in America first crossed the Appalachian Mountains (many of whom originated in European countries only now securing their freedom), the land they found was owned by the national government, a situation not unlike that which exists in Eastern Europe today. By distributing ownership to individuals, the Homestead Act allowed the American midwest and western plains to become the preeminent agricultural region in the world. It allowed "homesteaders" to own land, provided they lived on it for at least five years. The success of the Homestead Act was unprecedented in human history. The failure of socialism in Eastern Europe is comparably unprecedented. World War II, with its urgent demand for industrial production at any cost, led directly to the pollution of American air and water. The stagnant rivers and sooty skies of the 1950s and 1960s were not the result of unrestrained capitalism. They were the legacy of state-directed wartime production. In Eastern Europe, state-directed industrialization had a predictably similar effect--although the greater proportion of state control produced even worse environmental mishaps. The lesson of the American experience is this: the people themselves must be empowered to protect their environmental and economic interests. After decades of centrally-directed abuses, the forests, the rivers, and the air of Eastern Europe are in critical disrepair. But more central planning will simply produce political trade-offs. Unlike America, which developed a strong economy through free enterprise and then imposed an environmental regulatory system, Eastern Europe has the unique opportunity to develop economic property rights that incorporate ecological values simultaneously. The dual crisis of the economy and the ecology is the direct result of socialism's denial of individual rights. The solution is to create and defend private rights throughout society--as a defense against political and bureaucratic tyranny. Likewise, private ecological rights offer the opportunity for Eastern Europeans to fight off a different, but related, encroachment of individual rights by excessive government control. Political pressures from the West may require that individual property rights in Eastern European environmental amenities be given a more appealing name, such as "National Ecological Leases." They might even be limited to a specific term of, say, ten years. However, they must be perpetually renewable and freely transferable. In addition, particular aspects that comprise the whole must be severable. For instance, the homesteader must be able to assign or lease to others the rights to farm, hunt, plant trees, or fish on particular tracts of his land. Regional and municipal airsheds could be privatized, or at the very least placed under the control of local officials, directly responsible to the local population. Ecological homesteading need not be limited to fishing ponds and potato farms. Forests should be distributed among those willing to live there and graze cattle, or to manage for firewood, timber, and the like. Society would not necessarily be altered in radical ways under this proposal since the primary candidates for homesteading would be those who currently live or work on state farms. Ongoing privatization reforms may, under certain circumstances, grant priority to those who have legitimate claims against the former communist governments for previous confiscation of property. It is well documented in the Soviet Union, for example, that private plots grow significantly more food than collectivized farmlands. Private ownership provides individuals with the incentive to make investments, which in turn reduce wastefulness. This example of stewardship of a scarce resource by self-interested "owners" should ease concern over widespread abuse of the environment if private property rights are adopted in former socialist nations. Individuals always desire to capture the economic value of resources, and environmental resources are no different. Eastern European governments can harness that energy by encouraging markets to develop, rather than continuing to drive them underground into an illegal "black" economy. In the area of western assistance, more attention must be given to private sector development as opposed to government-to-government loans. Private commercial banks are in a superior position to ascertain the needs of individuals for such things as homes, farm equipment, and training. Government-backed loans remove accountability from both the bureaucratic institutions involved and the recipients. The problem results from the phenomenon of an international lending nomenklatura taking money from taxpayers and transferring it to other unaccountable bureaucracies. Before the market economy is even developed, bureaucrats are attempting to develop an infrastructure by which they can regulate it. Despite its blemished record in promoting economic development, the U.S. foreign aid establishment now insists that it can be the champion of the global environment. Yet, with its long history of failure in managing traditional development, why should anyone expect it to be successful in managing ecologically sustainable development? Inept lending practices promise to beget an ecological version of the S&L crisis. A comprehensive proposal for the reform of western lending practices is beyond the scope of this paper. But, it should be noted that this aspect of U.S. foreign aid has its own implications for Eastern Europe's ecology, and could imperil its environmental well-being. The debt burdens being imposed on the undeveloped economic systems of the region will siphon off much of the new wealth that is generated--if, indeed, any is generated at all. Massive debt obligations will necessarily compete for economic resources with the productive and innovative sectors of the economy. Of vital importance to the environment is how quickly Eastern Europe can adopt environmentally-beneficial management techniques, customs, and institutions. Only a healthy private economy can achieve such goals. </body> </article> </text>