Factories in developing countries exhibit great variety in environmental performance, despite the widely acknowledged weaknesses of their regulatory systems. Even in the poorest countries, some plants would satisfy OECD (Organization for Economic Commission and Development) emissions standards. World Bank researchers are currently investigating this phenomenon in several developing countries. Their evidence suggests that neighboring communities and market forces significantly affect factories environmental performance, even where formal regulation does not exist.

In countries as different as China, Brazil, Mexico, and Indonesia, communities that are richer, better educated, and more organized find many ways of enforcing environmental norms for neighboring factories. Where formal regulators are present, communities use the political process to influence the tightness of enforcement. Where formal regulators are absent or ineffective, community groups or nongovernmental organizations may implement a kind of informal regulation. The agents of informal regulation local religious institutions, social organizations, community leaders, citizens movements, or politicians vary from country to country, but the pattern is similar: factories negotiate directly with local communities, responding to social norms and/or explicit or implicit threats of social, political, or physical sanctions if they fail to reduce the damages caused by their emissions.

Neighboring communities and market forces can affect a factory's environmental performance in tandem with regulations or in the absence of regulation

Market forces also seem powerful under some conditions. Evidence from both OECD and developing countries suggests that environmental reputation matters for firms whose expected costs or revenues are affected by customer, supplier, and stockholder judgments of firms environmental performance. For companies sensitive to maintaining a good reputation, public recognition of good or bad performance may over time translate to large expected gains or losses.

Two recent World Bank studies provide good illustrations of these forces at work. The first study, an analysis of China s noncompliance fee (or levy) for water polluters, highlights the effect of local conditions on the actual enforcement practices of regulatory agencies. The analysis identifies two sets of local factors that affect provincial variations in enforcement of the levy. The first, reflecting the principles of environmental economics, is local valuation of pollution damage. This has three components: total pollution load, size of exposed population, and local income. The second is community capacity to understand and act on local environmental problems, indexed by measures of information, education, and bargaining power. (Hettige, M., M. Singh, S. Pargal and D. Wheeler. 1995. Patterns in Pollution Intensity: Formal and Informal Regulation of Industrial Pollution in the U.S. and Indonesia. Presented at the Annual Meeting, American Economic Association, January, Washington, D.C. Laplante, B. and D. Wheeler. 1994. The Market Response to Environmental Incidents in Canada: A Theoretical and Empirical Analysis. Southern Economic Journal 60(3): 657-672.) The results suggest an interesting interpretation of Chinese pollution control policy. Lacking the appropriate information for determining optimal pollution levels in each province, the national government sets the official pollution levy at a reference level and lets officials in each province trade off the costs and benefits of effective implementation. By implication, the uniform implementation of national standards and/or levy rates is not optimal; local conditions determine what these should be.

In the second study, World Bank staff members have recently participated in the design and evaluation of Indonesia s Program for Pollution Control, Evaluation, and Rating (PROPER), which entails public disclosure of environmental performance ratings for factories. In PROPER, a polluter is assigned a color rating based on BAPEDAL s (Indonesia s environmental agency) evaluation of its environmental performance. A blue rating is given to factories that comply with national regulatory standards, gold is reserved for world-class performers, and black for factories that have made no attempt to control pollution and are causing serious damage. Intermediate ratings are red for factories that have some pollution control but fall short of compliance and green for factories whose emissions control and housekeeping procedures significantly exceed those needed for compliance.

Why should PROPER have a significant impact on pollution? First, although World Bank researchers have noted a pervasive pattern of informal regulation or community influence on polluters behavior, Bank findings also suggest that communities frequently need better information about pollution sources and risks. In this context, public disclosure offers significant empowerment. Armed with government-certified performance ratings, communities are in a much stronger position to negotiate pollution control agreements with neighboring factories.

Second, from the market perspective, PROPER provides new incentives for improved environmental performance. Under public disclosure, external financing will be more difficult for firms whose poor pollution record makes them risky investments. Conversely, gold and green firms may well earn premiums in markets in which environmental reputation matters. PROPER improves the regulators information by encouraging good performers to identify themselves. It also provides competitive incentives for superior performers to assist regulators in identifying poor performers, because disclosure will penalize the latter.

PROPER s short-term impact has apparently been substantial. Many plants rated red in the initial disclosure have attained blue status. Of six plants initially rated black, five have already moved to red or blue status, and the sixth has been brought to court by a neighboring community. Although preliminary, these results suggest that industrial polluters in developing countries respond to the incentives created by public disclosure. This is good news for hard-pressed environmental regulators, since PROPER-type programs represent a potentially potent, low-cost enforcement tool.

A program garnering attention for possible replication in other countries is Indonesia s Program for Pollution Control, Evaluation and Rating (PROPER), launched in 1995.

After enlisting 200 volunteer industries, BAPEDAL (Indonesia s environmental agency) collected self-reported pollution data, assigned environmental performance ratings to each polluter, reported results back to industry, and, after an interval to allow for improvements,publicly announced the results with a color-coded grading system. BAPEDAL then collected evidence suggesting that public ratings had indeed reduced water pollution, chiefly through the cultural device of shame avoidance and economic pressures, reinforced by conventional enforcement and citizen lawsuits. The program now reaches 400 firms, and the agency plans to enlist 1000 firms by the end of 1997 and include air and hazardous waste pollution to its scope.

Community NGOs, the international community, government institutions, and the general public rely on PROPER information to react accordingly. The Indonesian Stock Exchange, for example, will not list any firms for trading unless they have earned at least a blue rating.

The Philippines started a similar pilot program, entitled EcoWatch, in late 1996 that includes many of the features of PROPER, but adds the rating of municipal water and wastewater services. Mexico is also considering the appropriateness of the PROPER model.