The Economic Approach to Environmental and Natural Resources, 3e

Further Topics Part IV

Introduction • A quick inventory of environmental problems associated with developing countries includes: • the massive environmental degradation in Eastern Europe, • tropical deforestation, • desertification, • contamination of drinking water, • soil erosion, • loss of habitat of all types (including wetlands, grasslands, coral reefs, a variety of aquatic habitat and forests), • loss of biodiversity, and • depletion of fisheries.

Introduction • In the 1970s and early 1980s, many people argued that environmental quality was a luxury that only the rich nations could afford. • However, in the latter 1980s it became apparent that deteriorating environmental quality was interfering with economic development and that economic development could not take place without environmental improvement. • This focus of this chapter is the link between environmental quality and economic development.

Income, Growth, and the Environment • In the 1960s, the field of development economics, which looks at how countries can increase their economic well-being, took on increasing importance as former colonies in Africa and Asia became independent. • The definition of well-being that people tended to focus on was per capita GDP, with capital accumulation the primary tool to increase per capita GDP. • The “vicious cycle of poverty” was defined as a situation where low income leads to low saving, and consequently low investment, which in turn meant little capital accumulation, which translated into low productivity and therefore low income. • Development projects initiated in the 1960s, '70s and early '80s focused on capital formation. Large and often unsuccessful, capital-intensive projects involving dams, factories, energy facilities, and large scale agriculture were initiated. • Some feel that the failure of these projects was linked to the failure to consider the environmental quality. Table 18.1 shows how the standard of living has declined in many African countries.

The Effect of Environmental Quality on Economic Productivity • Environmental quality can affect economic productivity in two major ways. • First, environmental degradation can drastically affect human health, which can affect the productivity of labor and redirect resources to deal with the adverse health affects. • Intestinal disorders (such as cholera and dysentery) from contaminated drinking water are the leading causes of death of young children in many developing countries. • Second, the environmental resources are a direct input into many production processes and environmental degradation interferes with the production activities. • Deforestation which leads to soil erosion will inhibit agriculture and cause siltation in river and embayments and diminished fishery output.

The Effect of Poverty on the Environment • Much of the environmental degradation is due to the low standard of living that currently exists in developing countries. • Current low income makes it very difficult to meet current consumption needs, so environmental resources are unwisely exploited to produce current income. • Forests are decimated to produce temporary bursts of income to meet current consumption needs. • Similarly, agriculture is cultivated too intensely in order to produce food for the short run, which leads to soil erosion and declines in its fertility.

The Effect of Poverty on the Environment • In many countries, particularly Eastern Europe and populous developing countries like India, Brazil, Mexico, China, and Indonesia high levels of pollution are produced from industrial activity because the government does not wish to redirect much needed resources from production to environmental improvement. • Unfortunately, high levels of air and water pollution degrade public health, reduce the productivity of agriculture, industry, fisheries, and forestry, and generate other social costs that reduce the future production capability of the country. • The addition of declining environmental conditions to the “vicious cycle of poverty” assures a further decline in income as the decline in environmental quality reduces productivity of labor.

The Effect of Population Growth on Income • In 1798, Thomas Robert Malthus authored An Essay on the Principle of Population, which suggested that the rate of population growth was greater than the rate of growth in labor productivity and thus, population will eventually outstrip the food supply. • One possible explanation for the lack of fulfillment of this prediction is provided by Barnett and Morse (1963), who suggest that since Malthus only considered a two-input model (labor and land), he could not account for the change in production capabilities from technological innovation. • However, even if one considers other inputs, it is possible that population growth may reduce income. • Faster population growth implies greater current consumption needs, which inhibits the ability to invest and may lead to the destructive overexploitation of environmental resources.

The Effect of Population Growth on Income • Population growth may also exacerbate the negative effects on income of inefficient government policies and market failures, such as poorly defined property rights. • Population growth tends to exacerbate population inequality. As the population grows the land available for the poorest elements of society remains constant. • As a result, population growth tends to shrink the size of the average agrarian family's plot and smaller plots imply more intensive use of the resource, which in turn results in an eventual decline in the productivity of the land. • This leads to an increase in the poverty of the poorest families. • The effect of income on population growth has been characterized by a model known as the demographic transition model.

The Effect of Population Growth on Income • The basic premise behind this model is that population growth is related to the stages of development. • In the traditional conception of the model, there are three stages of economic development. • The traditional agrarian society is labeled Stage I on the graph presented in Figure 18.3. • The beginning of industrialization is labeled Stage II and the industrialized society is labeled Stage III. • In the agrarian stage, both birth rates and death rates are relatively high, but birth rates are only slightly higher than death rates, so population grows slowly. • In the second stage, death rates fall due to improvements in public health (vaccination, pest control, availability of antibiotics). However, birth rates do not fall commensurately, so population growth accelerates.

The Effect of Population Growth on Income • In Stage III, as the countries become industrialized, the demographic transition occurs and birth rates fall to more closely parallel death rates. Once again, population growth slows. • This model fits the historical record of population growth in Europe and North America, as well as the rapidly industrializing countries of East Asia. • Evidence suggests that there is a fourth stage where industrialized countries mature, population growth falls to equal or below the replacement rate, and zero population growth occurs.

The Microeconomics of Reproduction • Economists like to explain the decision to have children as a microeconomic utility maximizing decision, where the household (both parents) weighs the costs and benefits of having an additional child. • Figure 18.4 illustrates the decline in marginal benefits with the increase in the number of children and the rise in marginal costs associated with an additional child. • The optimal number of children occurs where marginal costs are equal to marginal benefits. • Any factors that serve to shift the marginal benefit function downward will reduce the number of children per family, and any factors that shift the marginal cost function upward will also reduce the number of children per family.

The Microeconomics of Reproduction • One economic benefit of having children is for use as labor inputs to production processes. • More children will increase agricultural production, although with a decline in environmental quality because of intense cultivation, this may be a short term increase. • In an agrarian society, children virtually always have a positive marginal product. • As a society becomes more industrialized and urbanized, the importance of children as an economic input diminishes. • Modern manufacturing requires an adult labor force. • One interesting feature of the industrial/urban economy is that the importance of classroom learning increases. • As the returns to education grow, an income maximizing strategy might be to increase the investment in each child (better education, nutrition, etc.) and to have fewer children.

The Microeconomics of Reproduction • An additional economic benefit of having children is that the children can provide for the parents in their old age. • In agrarian societies, there are limited ways to store wealth for the future, as most wealth is in the form of perishable foodstuffs, or livestock that has high maintenance costs. • Consequently, the best way for a husband and wife to insure that their old age is not a completely bleak and miserable experience is to have a lot of children to provide for the parents when the parents are no longer capable of providing for themselves. • The need to have children to support one's old age diminishes as an economy develops and it becomes easier to store wealth and public social support systems improve.

The Microeconomics of Reproduction • A variety of factors affect the marginal costs associated with increasing family size. • These include: the costs of education, the costs of food and housing, and the opportunity costs of the mother's time. • As an economy becomes more urbanized and industrialized, all of the above factors tend to increase the marginal costs associated with increasing family size. • As classroom education becomes more important, the costs of making a child more productive increases. • Similarly, as one moves from an agrarian to urban society, the costs of food and housing increase. • However the changing role of the opportunity costs of the mother’s time is more complicated.

The Economic Role of Women, Population Growth, and the Environment • In most rural economies in developing countries, women supply the bulk of the labor to the subsistence agricultural economy. • In these agrarian societies, children are not a hindrance to the mother accomplishing her agricultural chores. • Very small babies are strapped to their mother's breast and older children accompany her to the field. • In urban environments, where the mother's work may involve service, manufacturing, or clerical jobs, the presence of children on the work site is not allowed. • Consequently, having children interrupts a woman's employment and reduces her productivity, development of her human capital, and chances for advancement.

The Economic Role of Women, Population Growth, and the Environment • As equality of treatment for women increases, and as women's roles in the monetary economy increase, one would expect birth rates to fall. • Economic development does not guarantee entrance of women into the market economy and equal opportunities, but lack of these conditions may contribute to limits on economic development.

Traditional Development Models and Their Flaws • Traditional models of development tend to focus on increasing GDP or per capita GDP by increasing capital, transferring new technology to developing countries and through increasing human capital. • In order to discuss whether or not these traditional methods work, it is necessary to state exactly what is meant by “development.” • Your text adopts the definition developed by Michael Todaro: • "...both a physical reality and state of mind in which society has, through some combination of social, economic and institutional process, secured the means for obtaining a better life.”

Traditional Development Models and Their Flaws • “Whatever the specific components of this better life, development in all societies must have at least the following three objectives; • 1) To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, health and protection. • 2) To raise levels of living including, in addition to higher income, the provision of more jobs, better education and greater attention to cultural and humanistic values, all of which will serve not only to enhance material well-being but also to generate greater individual and national self-esteem. And, • 3) To expand the range of economic and social choices available to individuals by freeing them from servitude and dependence not only in relation to other people and nation-states but also to the force of ignorance and human misery."

Traditional Development Models and Their Flaws • Despite the attempt by Todaro and others to broaden the definition of development, both commercial bank and international loan agencies focus on GDP measures as an indication of creditworthiness. • The failure of GDP to include subsistence agriculture production, since crops are not grown for market but for family consumption, is a significant exclusion. • As a consequence, this measure of development does not consider the fact that resources are allocated toward meeting the basic needs of the population.

The Impact of the Exclusion of Subsistence Agriculture from Measures of GDP • The second drawback to the use of GDP as a measure of development is that GDP does not include a measure for natural capital. • As such, GDP will not reflect a decline in the quality of these assets (for example, soil loss or forest depletion). • The exclusion of subsistence agriculture from measures of GDP encourages a set of policies that favor cash crops (crops grown for sale, particularly in export markets; such as coffee, tea, sugar, bananas, cocoa, palm oil and tobacco) at the expense of subsistence crops. • Another benefit of cash crops for export is that the sale of these crops brings in foreign currency that can be used to purchase imports or repay debt.

The Impact of the Exclusion of Subsistence Agriculture from Measures of GDP • Policies which encourage export crops include fertilizer subsidies, agricultural extension activities, small loan programs, the development of export infrastructure, and price ceilings or food crops. • One of the most important spillovers is that more land is devoted to cash crops, at the expense of land devoted to subsistence crops and at the expense of land devoted to natural habitats such as forests. • Since many export crops are monocultures, they tend to be very susceptible to disease and pests and require tremendous chemical applications to combat these pests. • The result is a chemical hazard for workers and those who live downstream.

The Impact of the Exclusion of Subsistence Agriculture from Measures of GDP • In addition to these environmental degradation effects, there is the loss of common-property resources, such as forests and savannas. • The loss of these commons, the environmental degradation of land in general and the conversion of land from subsistence farming to cash crops may serve to increase the economic hardship and continued impoverishment of women in developing countries. • Jacobson argues that development through market activities will not produce improvements for women and therefore, development programs need to be specifically oriented toward promoting the economic activity of women. • She also argues that given the social, cultural, and economic structures in many developing countries, one cannot expect a flow of benefits from the male dominated market economy to the female dominated subsistence economy.

The Impact of the Exclusion of Subsistence Agriculture from Measures of GDP • One interesting by-product of the female dominated subsistence economy is the leadership role taken by women in the preservation of the environment. • In Kenya, two of the most important grassroots environmental organizations were founded by women and their activities have been implemented by women. • Several decades ago there was a feeling among those involved in international development that development efforts had to take place entirely within the cultural context of the developing country. • In the opinion of the author of your text, when basic human rights for women conflict with current cultural norms, the development process should be constructed to help women obtain these rights.

Sustainable Development • The focus on GDP as a measurement of development tends to promote activities that lead to the increase of current GDP at the expense of future GDP. • Development policies that promote activities that are not environmentally sustainable do not really contribute to the economic development of the nation, as future possibilities are eroded by the current economic activities.

Sustainable Development • David Pearce, Edward Barbier, and Anil Markandya suggest that sustainable development be defined as a process whereby the following objectives of development (or a modified version) are non-decreasing over time: • Increases in real per capita income; • Improvements in health and nutritional status; • Educational achievement; • Access to resources and • A "fairer" distribution of income.

Sustainable Development • The Third World Commission on Environment and Development defines sustainable development as a process by which the current generations can "meet their needs without compromising the ability of future generations to meet their need." • A necessary condition for sustainability is that the stock of physical capital be non-decreasing. • This requires that the stock of renewable resources must be increasing if the exhaustible resources are decreasing. • Economic development plans that treat renewable resources, such as the soil, forest, fish stocks, surface and groundwater, coral reefs, and other environmental resources as an exhaustible resource are not sustainable.

Sustainable Development Policy • Government development policies often create incentives for environmental degradation. • The World Development Report 1992 lists several types of inefficient government development policies, including: • subsidization of agricultural inputs such as fertilizer; • subsidization of energy inputs; • subsidization of logging and cattle ranching; • nonaccountability of public sector polluters; • provision of services such as water and electricity at subsidized prices, and • inefficient management of public lands.

Sustainable Development Policy • The first step towards a well constructed development plan is the elimination of the above policy negatives. • The World Bank lists three classes of development policies that can increase the quality of life of developing countries, will minimize environmental degradation, and can be sustainable. • These include: • the elimination of inefficient policies, • the provision of public and private investments that have net benefits independent of environmental benefits, and • the correction of market failures that lead to reduced environmental quality.

Sustainable Development Policy • Inefficient government policies that lead to the loss of GDP and the deterioration of the environment include: subsidies for production inputs, subsidies for certain extractive activities such as cattle ranching and logging, and poorly defined property rights to land for farmers. • Government subsidies promote excess use of some inputs such as fertilizer and pesticides which have adverse external effects and may promote inefficient projects. • Government subsidization of ranching and logging has been discussed in detail in earlier chapters.

Sustainable Development Policy • If property rights are appropriately defined, the farmers have an incentive to treat their land as a long-term asset and protect their land from degradation. • Policies that initiate public investment and that encourage private investment can also lead to important development benefits. • These investments include investment in water supply and sanitation, soil conservation, and the education of women. • It is also important to address market failures that cause a divergence between the marginal social costs and marginal private costs of market activities. • An important market failure that needs to be addressed is the existence of imperfect information about sustainable techniques.

The Role of Developed Nations • Figure 18.2 provides considerable insight into how developed nations can help developing countries protect their environmental resources and improve both their short-term and long-term prospects for economic development. • The problem is that short-term needs and low current income lead to environmental degradation. • The obvious solution is for developed countries to help developing countries meet their short-term needs and accumulate more and better human-made capital, improve human capital and preserve their environmental resources. • One area where this can be done is with debt relief. • Other steps can be taken to create conditions for environmentally friendly markets.

Summary • Many Third World countries find themselves in a poverty trap that is partially generated by environmental degradation. • Poverty leads to overexploitation of environmental resources and population growth may exacerbate this problem. • Current development policies must be aimed at breaking the cycle of poverty and environmental destruction. • Government policies must not ignore the role of women in sustainable development. • Developed countries must help meet the current needs of developing countries to help break the cycle of poverty and environmental degradation.

The Economic Approach to Environmental and Natural Resources, 3e