A synthesis of four case studies of global product chains

The case studies focused on:

• Copper from Zambia;
• Cotton and textiles from Pakistan;
• Semi-conductors from the Philippines; and
• Ecotourism in Costa Rica.

The case studies were selected with a view to product types ("renewable" and "nonrenewable" primary commodities, (semi) manufactures, services), environmental impacts, and geographical distribution. Pragmatic considerations concerned preferences for cooperation with certain research partners and their fields of expertise and availability.

A large number of different case studies with different products, countries, and research partners would have fitted the selection criteria and any choice is somewhat arbitrary. Nevertheless, looking back at the process and considering the quality, diversity and richness of the case studies, we feel that a lesser choice could have been made. The case study results are so rich and diverse that they invite a number of observations at a more general level. This chapter presents these general observations after it has briefly introduced the four case studies. The full case studies themselves constitute Part 2 of this Volume.

1.1 Copper from Zambia

Copper mining has a long history in Zambia, from the late nineteenth century when its territory was brought under British rule by the British South Africa Company, through Independence in 1964 to the present day. Zambia's economy is, and always has been, exceptionally dependent on its mining industry. Copper accounts for about 10% of Zambia's GDP (down from 40% in 1965) and a startling 90% of export revenues. Any changes in its copper industry therefore have a direct impact on Zambia's economy.

On the world market, Zambia is presently among the ten-biggest producer of copper, preceeded by countries such as Chile, the United States, Canada, and Indonesia. Chile, already the world's number one producer, will increase its lead up to the year 2000 and beyond. The mining sector in Zambia is stagnant. The major consumer countries for refined copper are the US, Japan and EU, but Asia's share in copper consumption is rapidly rising.

The copper production process consists of several stages. Copper is mined, concentrated, smelted, refined, and fabricated. The concentration of copper usually takes place near the mine, but the other process steps can take place anywhere, thus requiring transport of the (semi-) processed material. In Zambia, smelting occurs locally, not least because of problems with transport. Smelting is energy intensive so that large implied environmental subsidies canbe found in energy prices. The biggest purchaser of copper is the electrial engineering industry that uses the metal in electricity generation and distribution equipment. Copper can be easily recycled. In the Western world, more than one-third of copper consumption is supplied by recycled or "secondary" copper.

Environmental impacts of the copper chain include air pollution, water pollution and landscape destruction. The energy consumption of primary copper production is huge. The environmental impacts are predominantly concentrated in the mining, concentrating and smelting stages, thus located to a significant extent near the place of extraction. The copper chain is dominated by big actors, both upstream (mining companies), downstream (electrical engineering companies), and in-between (international traders). Copper is sold to industrial users who incorporate it into products that are sold to consmers, government agencies and other industrial users. An important institution in the copper chain is the London Metal Exchange which establishes spot and futures markets for copper. Other important actors in the copper chain include processors, "scrap"collectors, recycling companies, financial services and governments.

The government of Zambia has played a particularly active role in the copper chain as it gradually brought Zambia's copper mines under State control after independence. The nationalization of the mines did not bring the hoped-for results. On the contrary, the flow of government revenue from the mines swiftly dried-up and never recovered. At the present time, the government of Zambia derives virtually no revenue directly from the mines. Since the return of Zambia to a multi-party democracy in 1991, the government became committed to privatization of state companies, including the mines. The process of privatization is now well under way. The hope is that privitization will create a revenue stream that can be taxed. Weak government institutions render the prospect of deriving direct revenue from mines controlled by large multinationally organized corporations uncertain.

The biggest obstacle to improved environmental management of the copper chain is the lack of revenues at mine level that could be used to address environmental problems, and, in general, the weak negotiating position of the Zambian government vis-a-vis the mining industry because of Zambia's economic and social dependency on the sector. There is little local pressure for environmental change in the Zambian mining sector. The copper chain is not the object of much public pressure in the north either, except from activist organizations engaged in mining issues and from shareholder action. Some industrial users of copper in the North are implementing ISO 14 000 or comparable management systems. This requires them to question the environmental practices of their suppliers and will ultimately cause a shift to certified mines even though prices on the LME do not reflect environmental performance in any systematic manner. Additional pressure for change comes from financial institutions (e.g. insurance companies) which fear that unsustainable mining operations may spark-off social unrest and may generate future liability claims.

1.2 Cotton and textiles from Pakistan

1.3 Semi-conductors from the Philippines

The semi-conductor industry, is a relatively young industry in the Philippines, as is the electronics industry in general. During the last fifteen years, the electronics industry witnessed a dramatic growth and now earns over 50% of the export revenues of the Philippines. Semi-conductors are the most important output of the electronics industry of the Philippines, accounting for about three quarters of its export value.

The production process of semi-conductors includes the stages of wafer design, wafer fabrication, assembly and product testing. The first two stages-wafer design and fabrication--are capital intensive and occur in mainly in industrialized countries, the latter two stages--assembly and testing--are labor intensive and are shifted to offshore production units, mainly in developing countries, for example the Philippines. The semi-conductor industry is truly global and characterized by highly competitive sourcing with very low profit margins.

Semi-conductors are sold to manufacturers who incorporate them in products of the telecommunications, consumer and industrial electronics, computer/business equipment industries. The world demand for semi-conductors is booming. The dominant actors in the semi-conductor chain are the big electronics companies, such as Intel, Motorola, Texas Instruments, Philips, Siemens, NEC, Toshiba, Hitachi and National Semiconductor. Semiconductors are also produced by independent contract-manufacturers, of which there are approximately 90 competing world-wide. Amkor/Anam and Hyundai of Korea and ASE of Taiwan are examples of large contract-manufacturers. In the Philippines both types of companies can be found, as well as locally-owned sub-contractors. Inputs to the semiconductor industry, such as chemicals and solvents, may be locally produced or imported.

Environmental problems associated with the semiconductor chain are concentrated in the production stage (process emissions) and in the waste disposal stage. Important environmental regulations and policies which have and are affecting environmental problems in the waste disposal stage are the Montreal Protocol, the Basel Convention, and various take-back schemes for electronic equipment developed in European and Asian countries.

The pressures for environmental change in the semi-conductor industry mainly come from two sources: the government and consumer groups. In terms of government pressures, a number of policies regarding emissions, hazardous materials, and waste disposal exist. In addition, many governments of consumer countries are legislating or considering legislating other standards and requirements. Consumer groups in the North clamor for more environmentally friendly electronics production. These pressures are being exerted mainly on the producers located in the industrialized markets. Proof of this is the character of legislation in Europe which places the ultimate responsibility for disposal on the manufacturer. However, because of this, and the holistic life-cycle approach, Philippine producers will eventually feel this pressure. The demands for environmentally sound components entering the end-products will travel through the chain. End-product manufacturers, because of pressures on them, will require more ecologically sound production of all its suppliers. It is in the interest of these mother companies to help Philippine companies to meet global standards. The pressures reverberate down to semiconductor suppliers down through the production chain and sometimes even to chemical and solvent suppliers. Hence, environmental improvement in this chain is too a large extent a supply management issue.

An additional impact of compulsory environmental standards for Philippine firms is that they can act as adeterrent to the entry of new firms. The most advanced segment of the Philippine semiconductor industry could therefore very well be expected to put pressure on the Philippine government to tighten up domestic environmental standards.

1.4 Ecotourism in Costa Rica

Costa Rica is a small country in Central America, blessed with extraordinary tropical ecosystems. In the mid-eighties it was discovered as an international tourist attraction, partly as a result of early investments of the Costa Ricangovernment in the development of a national park system. Costa Rica presently has the highest percentage of protected land in the world and these areas are relatively more accessible to tourists than those of other countries in the region. Presently, tourism is Costa Rica's top foreign earnings generator, surpassing more traditional exports such as bananas, coffee and beef. Comparative data on the net impact of these four sectors on the balance of payments are not available.

Worldwide, tourism is one of the fastest growing industries and has been described as a ipowerhousei in the global economy. Increasingly, the holiday destination is a developing country. The main driving forces of the demand for (international) tourism are increases in prosperity in Northern countries, technical progress in areas of transportation and communication, demographic trends and changing lifestyle patterns. These driving forces have resulted in a strong and diversified demand for holiday services. Tour operators and travel agents have responded to this demand by increased market segmentation and product differentiation. One fast growing market segement is special interest tourism, including nature tourism and ecotourism.

Ecotourism is not a trademark or a brand name, but rather a loosely defined concept referring to something like "responsible travel to natural areas which conserves the environment and sustains the well being of local people." The fact that the concept is not legally protected renders it vulnerable to expropriation and misuse, a practice sometimes referred to as "green washing." An interesting development in this respect is the development of a certificaton scheme for sustainable tourism by Costa Rica's Ministry of Tourism which can reduce the ability of irresponsible operators to capture the rents associated with Costa Rica's previous investments in conservation.

Notwithstanding the danger of misuse, the net impact of ecotourism for Costa Ricas' environment seems to have been positive so far, especially through financial support for the National Park system, private conservation efforts, and through environmental education activities, also for the local public. However, entrance fees for national parks are not currently being returned either to the parks or to local populations in any systematic manner.

The economic benefits of tourism for the host country are often less than what they may seem at first sight. In many instances, tourist revenues "leak" out of the host country's economy through import of the inputs for tourist services and because of the international appropriation of profits. The Costa Rica case study calculates that in the case of Costa Rica's ecotourism, however, almost 40% of the tourist revenues accrue to local providers of goods and services, a percentage which is high in comparison with conventional international tourism.

The Costa Rican government is presently at a crossroads with respect to its tourism policy: it can harness its ecotourism sector and invest in limited but sustainable growth, or it can continue to capitalize on its "green" image (and eventually run it down) by embarking on a strategy of mass tourism.

1.5 General observations

The four case studies show dramatic differences between product chains, depending on the nature of the product and the market on which it is traded. It is not possible to understand the complex relationships that exist without reference to specific product chains. In copper, industrial users are critical but local governments must enforce environmental disciplines; in electronics the multinational corporations which purchase semiconductors are emerging as the environmental managers for the entire chain; in textiles it is important to move up the value chain so as to obtain the resources for environmental management, but there is evidence that developing countries can have access to the necessary resources; in eco-tourism, the main issues revolve around the ability of the receiving country (rather than the country of provenance of tourists) to benefit from its efforts to maintain the environment.

At a more general level, it is possible to distinguish between primary commodities (taken from the natural environment), commodity manufactures (industrial products meeting a universal standard), other manufactures (produced according to individual manufacturer standards) and services. Relevant environmental issues will differ from class of product chains to the next.

The position of actors in the product chain is critical, with power (and the ability to capture rents) frequently increasing the closer to the purchaser an actor is. This power tends to be expressed by actors' ability to capture rents. It applies equally to any attempt to pass financial resources from consumer to producer. Product chains do not distinguish between resources available for internal production costs and those intended to cover external environmental costs. The environmental problems of a product also depend on the position in a chain. Once natural resources have been extracted from the environment to become primary econnomic goods (commodities), the ensuing environmental problems are related to waste disposal in all its forms. In practice, the problems of managing waste from industrial processes are quite different from those associated with natural resource extraction. While the cost of waste disposal can generally be calculated and internalized, the costs of extraction are highly uncertain.

There is increasing evidence that the waste issues of product chains can be managed. In many instances technical solutions directly related to the processes employed are available. Moreover waste reduction often brings efficiency gains. Finally waste issues arise predominantly "higher" up the product chain where the ability to capture the necessary rents is greater. Indeed, it is frequently the need to address these waste issues at the high end of the chain, close to the customer, that creates pressure down the chain to adapt products and production techniques.

The environmental problems associated with extraction are still often out of reach. They are irreducable in the sense that extraction always creates environmental impacts, rarely more so than in agriculture which transforms entire regions. No technical processes are available to eliminate these impacts, at best they can alleviate them per unit of production. Efficiency gains are often unavailable because certain impacts of extraction, for example the loss of wetlands or the need to conserve biodiversity, involve specific limitations on the relevant extractive activity. By defintion, extraction is at the beginning of the product chain where the ability to capture rents consistently is lowest. Finally, the impacts of extraction (e.g. on biodiversity or ecosystem values) cannot be fully expressed in economic terms.

Environment-friendly innovation by southern producers may attract free riders. The Costa Rica case study examines the ecotourismi innovation that was jointly created by a number of ecologically-minded entrepreneurs and the conservation efforts of the Costa Rican government. The carefully created green image of Costa Rica is in danger of being capitalized upon by the conventional sun and beach tourism sector, thereby dissipating the innovation rents. The certification for sustainable tourism initiative of the Costa Rican government is an attempt to curb this free rider behaviour. An important factor for the environmental management of international product chains is their degree of integration or dispersion. If a chain is highly integrated, such as the semi-conductor chain, the normal flow of information and finances makes integrated environmental management relatively easy. In a highly dispersed product chain, such as the cotton chain with its many small and anonymous actors, the flow of infomation and finances is highly restricted and integrated environmental management is particularly difficult.

There are some indications that product chains in which public and private interests are balanced will be more efficient and more readily managed. The copper case study in particular illustrates the issues relating to privitaization. On the one hand, privitization creates rents that can be taxed. On the other hand, it creates opportunities for rent transfer to escape taxation, in particular taxation by weaker governments (e.g. through offshore ownership, transfer pricing or underinvoicing).

In all product chains, public information (frequently possible only with government guarantees) is of central importance, for example in labeling, certification or toxic release inventories. Public information, in general, increases the efficiency of markets and reduces market power. This is particularly true of international markets, such as those for cotton orcopper--both of which have been disrupted recently. The role of speculators in these markets remains controversial. Their exposure to risk creates additional pressures for information which is not, however, invariably made public ; their participation increases the liquidity of markets; at the same time, such speculative markets are prone to over- and undershoot, reinforcing underlying trends at certain times.

Several case studies show the growing importance of private surveillance in international product chains. Where governments are limited in their scope of action, private companies can send inspectors anywhere within the context of private contracts. Although this would broaden the scope for integrated environmental management within product chains, the private information thus obtained could also worsen the information asymmetry between actors, solidifying market power, and leading to a less than optimal allocation of resources.

A particularly difficult problem are locally differentiated impacts in global product chains. Conditions of production differ from one cotton grower and from one copper mine to the next. In principle, these differences constitute important sources of comparative advantage. A grower with a ready supply of water should enjoy advantages over growers without such access and in theory the processes of trade liberalization will tend to shift production towards the grower with the greatest advantage. This assumption applies only, however, to costs that are calculable and internalized. In extractive activities, some costs are not calculable and other costs have not been internalized and the processes of environmental management will be widely seen as exarcebating pressures relating to trade liberalization that producers confront. The economic impact of trade liberalization and of environmental measures is strikingly similar: more efficient enterprises are advantaged while less efficient ones suffer penalties, resulting in structural economic change. This structural change serves the creation of more wealth and the promotion of environmental quality. Sustainable development can occur when both goals are served simultaneously. The difference between trade liberalization and environmental policy measures is that trade policy promotes economic efficiency defined only in economic terms whereas environmental measures seek to achieve the additional, sometimes congruent goal of environmental efficiency, that is the creation of more wealth utilizing fewer natural resources and producing less waste.

The study clearly shows that much more research on product chains is needed.