Potential gains from trade in dirty industries: revisiting Lawrence Summers' memo.

• Author: Johnson, Jay
• Position: Critical essay

Lawrence Summers has a long history of controversial statements. Well before his comments in 2005 as then-president of Harvard University about the underrepresentation of women on faculties for mathematics and science, Summers was the chief economist at the World Bank. In that position, he penned a memo to his colleagues in 1991 that was leaked to the public, drawing heated criticism. (1) In 1999, when President Bill Clinton nominated Summers as Secretary of the Treasury, the controversy over Summers' memo was revived during his Senate confirmation hearings. Hundreds of articles were posted on the Internet at that time attempting to sway public opinion against Summers.

The controversy remains alive. Debate continues over the effect that free trade or globalization has on developing nations and on the environment, with the prevailing attitude that some trade must be prohibited. Most developed nations therefore abide by the 1994 Basel Convention, which bans exports of toxic wastes to developing countries, but the continuing shift of pollution-intensive production to poor countries effectively exports toxics to them. (2)

As the World Bank's chief economist, Summers ostensibly worked to promote policies designed to "reduce global poverty," (3) and his memo was supposed to advance the development of that policy. However, scanning dozens of sites addressing the World Bank memo, we could not find one defending Summers. Rather than try to understand his position, the sites tried to smear his reputation and perpetuate the misunderstandings that have long motivated criticism of free trade and economic development policies.

The statement in Summers' memo that is most often mocked is: "I think the economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that." He continues: "I've always thought that under-populated countries in Africa are vastly under polluted." Critics consistently characterize this position to mean that he and the World Bank favored dumping toxic wastes on poor people without their consent. Without an understanding of how gains accrue even to trades in toxic wastes, or how economic progress occurs, his comments certainly sound heartless.

Defending Summers therefore requires a better explanation as to how these trades can result in gains to both richer and poorer nations. Although Summers' memo has been widely misinterpreted, his premise is valid and yet virtually undefended before the public by economists. Economic growth resulting from comparative advantage is impeccable evidence of gains from trade in all industries, including dirty industries, which arise from differences in values among various populations and their evaluation of risks.

Potential Gains from Trade: A Marginal Analysis

The "impeccable" logic to which Summers refers is the principle of comparative advantage applied to the handling of toxic wastes and to movements of polluting industries among countries. The principle suggests that a nation should export a good that it can produce more cheaply (at a lower opportunity cost in terms of forgone production of other goods or services) than other nations in exchange for goods it finds more costly to produce. The potential gains from trade are implied by well-documented facts about differences in standards of living between developed nations and developing ones such as in Africa, to which Summers specifically refers. The key to Summers' comment lies in the opportunity costs and forgone earnings of people of various economies. They respond differently to similar possibilities. As Summers explains, the relative consequences of hazardous waste for health in various economies depend on differences in opportunity costs among people. Summers' use of forgone earnings to measure these costs has misled those unfamiliar with the comparative advantage principle. We reserve comment on that for later. For now, note the fallacy of assuming that the rich person's perception of opportunity cost must also hold for a poor person. To understand how their perspectives may differ, ask: "If I were near starving, would I be willing to accept a job with higher earnings that increases the risk to my health from pollution?" We can answer this question by examining differences in fundamental measures of well-being such as health and life expectancy.

In the United States, (4) malignant cancers have caused an increasing share of deaths from 6 percent in 1900 to nearly 18 percent in 1950 and nearly 30 percent in 2000 (Figure l; Simon 1996: 238). Over the same period, life expectancy at birth has increased from 50 years to between 65 and 75 years (Lomborg 2001: 52). Income measured as real GDP per capita has increased from $11,100 (19965) in 1950 to $32,600 in 2000. (5) During this period, developed countries made great strides in reducing death from malnutrition, poor hygiene, and environmental diseases associated with poverty, such as cholera. At the same time, rising death rates from cancer have caused people with greater life expectancies to become more sensitive to causes of these cancers, which may include pollution. Because of their higher incomes, people in developed countries can afford, and are willing to pay, a higher price to dispose of these pollutants in a way that reduces risk to themselves. Also, being affluent, they can easily forgo further increases in income that industries generating these wastes might offer. The economic way of stating this relationship is that citizens of the developed world have a high opportunity cost in increases of pollution.

In the developing world, the situation is different. GDP per capita from 1950 to 2000 was about one-sixth that of the developed countries (Lomborg 2001: 71). Life expectancy in 1950 was only 40 years but increased to 63 years by 2000. (6) The low incomes and short life expectancies of people in developing countries are associated with causes of death that differ dramatically from those prevailing in developed countries. The leading causes of death, particularly of early death, in developing countries are malnutrition, unsafe drinking water, and poor sanitation and hygiene (Figure 2; Lomborg 2001: 335). Statistics for both developed and developing nations are compared in Table 1. Deaths due to pollution, malignancies, and other maladies associated with old age are nearly nonexistent, primarily because people in developing nations typically do not live long enough to be significantly exposed to such chronic risks. Of course, they are indeed exposed to pollutants. Many poor people around the...