Chile, the subject of this study, and Latin American countries as a whole have undergone substantial structural changes to open their trade regimes. Real growth in Latin American exports almost tripled between 1970 and 1990. Chile's ratio of exports to GDP rose from 12 percent to 32 percent during these two decades. This was the most dramatic increase of any country in the region.

Chile's trade policy has changed dramatically since the 1970s. From 1950 to 1973, the government emphasized import substitution. From 1973 to 1990, the government under General Pinochet implemented a free-market, outward-looking development strategy. Since 1990, the democratically elected governments of Aylwin (1990-94) and Frei (1994-present) have continued to implement this strategy. At the same time, the Aylwin and Frei governments have placed somewhat greater emphasis on environmental and social issues in economic policymaking.

In the forest, fishing, and mining sectors-the cases examined in this paper- export markets expanded, foreign direct investment increased, and downstream, higher value-added products gained an increasingly greater share of total production. Today, Chile is measurably the most open economy in Latin America. It sells almost one third of its production in international markets, its trade flows amount to almost 60 percent of GDP, and foreign investment represents almost 5 percent of GDP.

Is this scenario as rosy as it seems? One of the central themes of environmental economics is that traditional economic yardsticks are a poor measure of progress because they do not account for either resource depletion or environmental damages. Air and water pollution, for example, impose measurable costs in terms of human health damage, yet such costs are not typically accounted for in traditional measures of economic growth.

The dilemma facing policymakers is how to maximize public benefits from economic growth and trade while accounting for the environmental costs and benefits of export production. Currently, there is no method for calculating these costs and benefits and estimating their impact on the net benefits from export production. Policymakers need a more accurate indicator of the tension between export-orientated growth and sustainability that describes the tradeoffs between trade and the environment in comparable units.

This study contributes to resolving this dilemma by expanding a methodology for estimating the distortionary effects of government policies and market failures on production decisions first developed in the 1960s. The Domestic Resource Cost (DRC) methodology, developed by Michael Bruno in the early 1960s and applied to the Israeli economy, compares the domestic social (opportunity) costs of export production to foreign exchange earned. This present study marks the first time that this method has been applied within the context of trade and environment policy issues and extended to include environmental damages

The method is conducted in two steps. The first step-the conventional DRC analysis-measures the economic resource costs of production based on "social prices," i.e., prices of goods that reflect the true economic value absent of price distortions from taxes, subsidies, price controls, import tariffs, quotas or other government policies. The second step-the environmental DRC analysis (ERDC)-extends the analysis by estimating environmental impacts and including them in domestic costs of production. The most comprehensive analysis would include environmental impacts from all stages of production, ranging from extraction of raw materials to producing the final product. In this study, we elucidate the EDRC, identify priorities for environmental costs, and report the preliminary results.

The Environmental Domestic Resource Cost analysis can help inform policymakers in two ways. First, it reveals the extent to which government policies influence production incentives. The importance of economy-wide distortions, such as an overvalued exchange rate and targeted taxes and subsidies, can be measured and distinguished from industry-level distortions. Second, the analysis measures the degree to which damages or benefits to the environment affect net foreign exchange earnings from export. Comparisons between firms using advanced and conventional technologies can quantify increases in net foreign exchange earnings from adopting environmentally beneficial technologies.

This study adopts the framework of the conventional DRC approach to calculate the Environmental Domestic Resource Cost ratio, but includes input and output prices that reflect the full environmental impacts of production, or at least those that can be quantified. For example, the environmental damages from producing an export, if accounted for, would increase the cost of its production. Similarly, the environmental benefits of export production would decrease net production costs. An EDRC ratio of less than one indicates that an export activity earns more in foreign exchange than the domestic resource costs (including environmental costs) required to produce the export. An EDRC ratio greater than one indicates that a country incurs greater costs in terms of domestic resource usage and environmental damage from production than it earns in foreign exchange from the product's export.

This study evaluates the copper mining, fishmeal, and pulp and paper industries in Chile to illustrate the dilemma facing economists and policymakers in the developing world regarding trade and the environment. Specifically, it asks two questions:

• After factoring in environmental costs and benefits, is trade-induced expansion in the copper mining, fishmeal, and pulp and paper industries a net benefit for Chile's welfare?

• Is there a way to integrate estimates of environmental damage with conventional economic indicators to measures net national welfare effects from trade-induced growth?

Moreover, as is the case in most developing countries, it is difficult to obtain data from industry and sometimes, government sources. Corporations are generally not willing and are not required to disclose information about the environmental impacts of their production processes. Keeping such information behind industry walls makes quantitative analysis more difficult and has substantially slowed environmental decision making within the Chilean government.

Where data is available, it is often company or location specific. Abatement costs and damages will vary according to firm location and technology. Aggregating the available data across industries may misestimate actual environmental costs. Finally, it should be remembered that the reference values for the DRC analysis are world market prices which may also contain distortions. The DRC ratio is not a true measure of efficiency per se but rather a comparison of existing real world benchmarks.

Despite these significant constraints, the study still arrives at several important conclusions:

• In all three sectors, environmental damage occurs throughout the production chain from raw materials to final output. In some cases, damage can continue long after a company ceases operations.

• Accounting for the environmental impacts from refined copper production can cause a significant decrease in net foreign exchange earnings from copper exports.

• Low-technology companies operating in the fishmeal industry generate greater costs to society than they earn in foreign exchange.

• In the pulp and paper industry, environmental damages substantially dampen gains from trade.

Another important objective of this study was to identify government policies that could help promote the dual goals of economic growth and environmental quality. In the case of the pulp and paper industry, for example, the government should consider adopting market-based policy instruments such as water effluent fees as an effective and low-cost approach to enforce water emission standards. Until then, voluntary agreements should be used to encourage compliance with the standards. Other issues related to this sector that need to be addressed include plans to manage soil erosion, the enactment of water quality standards, and the supplanting of native forests by commercial plantations. Reforms should be forged through the participation of all affected parties on the basis of all available studies.

In the mining industry, the government should consider enacting a mine closure law with financial guarantees to avoid catastrophic cases of environmental damage after a company goes out of business. Water rights should be granted on a limited time basis and charged a fee according to scarcity and impact on the ecosystem. Other needed reforms include air quality standards for arsenic, water quality standards for acidification, soil standards, and improved safeguards for tailing dams and other solid waste deposits.

In the fishing industry, the government needs to carefully assess the environmental threats from overfishing and develop a strategy to improve the environmental performance of low-technology operators. Other reforms include development of a system of tradable fishing rights to protect against the depletion of stocks.

It is important to note that this study and its results are works in progress. The ERDC ratios the study provides reflect only a limited portion of the environmental issues in each sector. As such, the limitations and the preliminary character of the EDRC ratios must be recognized. However, the application of this approach to the context of trade and environmental issues, remains without precedent and its contributions are valuable indeed. The goal is to make the development of the study and the refinement of the methodology as participatory as possible by inviting interested parties to evaluate it at this early stage of its development and lend their comments and insights. In this process, intermediate results can be considered as valuable as the final values of the respective EDRC ratios. In the Chilean case, important relevant issues and questions related to environmental management have arisen due to this process. Issues range from the need to harmonize definitions of environmental investments, the clarification of differences in industry performance measured against emissions standards versus quality standards, to the implications of technological differences between companies for evaluating environmental costs at the social as well as private level.

This study is organized in four chapters with numerous appendixes. Chapter II provides background information about the forestry, fishing, and mining sectors. Chapter III uses the expanded DRC methodology to estimate the impact of trade liberalization in these three sectors. Chapter IV draws conclusions based on this analysis and suggests some policy reforms that could increase complementarities and reduce conflicts between trade-induced economic expansion and environmental quality and generate net welfare gains for the people of Chile.

CONCLUSION
Achieving the full benefits of trade liberalization depends on eliminating domestic policies that distort a country's comparative advantage and on correcting market failures that lead to pollution and natural resource degradation. This requires adjustments in both trade policy and environmental policy.

Most negative impacts from export production in Chile are caused by the failure of markets to capture all aspects of a production process. Only a few policies distort market incentives for production among the top three leading export industries in Chile. Reflecting Chile's tremendous progress in opening its trade regime and liberalizing its economy, the NPC calculations for all three industries are close to one. The diversion from the value one is mainly because of an exchange rate that is overvalued by about 6 percent. In the forestry and fishery sectors, the analysis revealed that there are some policies affecting the price of inputs that distort firms' production decisions.

In all three cases, the analysis reveals that widespread environmental damage occurs throughout the production chain from raw materials to final output. For some activities, environmental damages can continue over a long period after the company ceases operation. After a mine pit is closed, potential damages from acid rock drainage and collapsing waste impoundment structures can be greater than the damages that occurred during production. Given the wide range of environmental impacts from the production of resource-intensive exports, analysis of the entire product cycle is needed to ensure that all environmental effects are considered.

The net negative environmental costs from production of Chile's three leading export industries is taking a significant chunk out of the public welfare gains from those exports. The difference between the conventional and environmental DRC ratios is pronounced in all three cases. Even in the case of plantations for pulp manufacturing, where positive impacts from export production were estimated, other negative impacts significantly outweigh those measured environmental benefits. A more comprehensive study of environmental impacts would likely result in an even higher environmental DRC estimate.

Data Issues

The limited availability of data on environmental damages is a major problem in understanding the environmental impacts of trade liberalization. Because of data limitations, the environmental DRC ratios are significantly undervalued, which makes it difficult to set policy priorities.

This study is a first step towards a more systematic quantitative approach. Further research to value the environmental damages from export production is needed. In Chile, research based on a wider range of information should be promoted to test the robustness of these preliminary results. Such studies could provide significant benefits to policymakers. For example, past water effluent norms have been issued without any data collection or analysis of environmental and health damages from water contamination in Chile.

A clear lesson from Chile's experience is that collection and public dissemination of scientific and economic information on the environmental impacts of trade liberalization is an important role for government. In this area, more needs to be done. Industry-government cooperation is essential. Industry groups should provide information on environmental damages to the government both through voluntary efforts and an enforced legal framework.

The government of Chile needs to promote the generation of information on environmental impacts from production, establish laws and policies to disseminate this information to the public, and establish cooperative partnerships with business and the academic community to collect, compile, and analyze this information. Individual companies are not legally required and not generally willing to provide information. Greater public access to this information would facilitate informed public participation in policy debates.

In this regard, Chile is moving in the right direction. Over the past 10 years, new vehicles such as environmental impact assessments and public discussion forums have helped open the process to the public. The new Council on Sustainable Development is a promising new opportunity for public participation in environmental policy discussions. In addition, CONAMA has established a national information system on the Internet. The website contains information about CONAMA's work and links to different institutions that generate different types of environmental information.

Technology Issues

Adoption of modern technologies greatly enhances the gains from trade. But trade liberalization does not guarantee that all firms improve the efficiency of their operations. Long after trade liberalization, there can be significant differences in the extent of environmental damage across firms, which are largely a result of different technologies.

In all three sectors, state-owned firms selling exclusively to the domestic market have been the last to invest in modern technologies. In the mining sector, foreign companies typically are first to adopt modern environmental policies and practices. In the fishmeal industry, differences in environmental performance across industries can be large and sustained for decades after trade liberalization is initiated.

To maximize gains from trade, industry and government need to implement policies that will elevate environmental standards of the worst performers in leading export markets. Broadening the positive impacts of trade beyond the environmental leaders most likely requires a combination of industry and government efforts, including:

• Introduction of ISO 14,000 management practices.
• New policies to promote technology diffusion should be targeted to those export industries causing the greatest harm to the environment.

Environmental policies targeted to key export industries are needed to mitigate the negative environmental impacts of expanded production resulting from trade liberalization. Such polices include:

Mining

• Air quality standards for arsenic. The government is studying arsenic exposure and the link to mining activities; arsenic standards have been issued. Standards also are needed for other contaminants such as heavy metals, copper in particles, and oxides emitted from smelters.
• Water quality standards for the environment. CONAMA has begun a public consultation process regarding a water quality standard for the environment, including continental and sea water. While studies of the effects of contaminants on native species of flora and fauna are carried out, a transitional standard is needed.
• Improved safeguards for tailings dams and other solid waste deposits. Decree 86 of the Ministry of Mining (1971) needs to be updated, formally introducing the standards that have been applied to the construction, operation and closure of tailings dams.
• Introduce standards for the effects of contaminants on the depletion of the ozone layer and on climate change. While Chile signed the Montreal Protocol and recently the Convention for Climate Change, the standards have not yet been required formally within the EIA system.
• Mine closure laws.A mine closure law that includes financial guarantees is needed.

Forestry

• The Government of Chile needs to gain greater understanding of the possible environmental effects from plantation standings and pulp production. Several environmental problems-including soil erosion from plantation standings and air contamination and foul odors from pulp production-could not be taken into account at all in the DRC calculation due to lack of data. Future work should concentrate on generating more information to refine policy reform priorities and design better policy instruments. For example, an initiative similar to the Environmental Valuation Reference Inventory by Environment Canada could be useful to systematize valuation data from the outset.
• The government should consider adopting market-based policy instruments such as water effluent fees as an effective and low-cost approach to enforce water emission standards. Also, voluntary agreements should be used to ensure medium-term compliance with the norms.

Fisheries

• Consider more market-based instruments for environmental protection from fishing. Command and control measures have not been sufficient to protect the resource base and reduce pollution beyond the level of abatement that affects the companies' bottom lines. Instruments could include effluent taxes to reduce water contamination, licensing based on the type and scarcity of the species caught, and individual tradeable quotas.
• Regional authorities need to play an important role in data collection, analysis, and policymaking in the sector, particularly involving foul odors and other localized environmental impacts.
• The Ministry of Economy needs to devote more resources to assess the environmental threats of over-fishing. This will require data collection and analysis of the stock size, reproduction, and interactions between different species, particularly for those species native mainly to Chilean waters. More comprehensive studies of the maximum fishing effort that can be sustained can also help design more effective policy instruments.