Transcript Chapter 18

The Economic Approach to
Environmental and Natural
Resources, 3e
By James R. Kahn
© 2005 South-Western, part of the Thomson Corporation
Part IV
Further Topics
Chapter 18
The Environment and
Economic Growth in Third
World Countries
© 2004 Thomson Learning/South-Western
4
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.
5
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.
6
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, capitalintensive 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.
7
8
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.
9
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.
10
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.
11
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.
12
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.
13
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.
14
15
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.
16
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.
17
18
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.
19
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.
20
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.
21
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.
22
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.
23
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.”
24
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 nationstates but also to the force of ignorance and human misery."
25
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.
26
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.
27
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.
28
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.
29
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.
30
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.
31
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:
1.
2.
3.
4.
5.
Increases in real per capita income;
Improvements in health and nutritional status;
Educational achievement;
Access to resources and
A "fairer" distribution of income.
32
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.
33
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:
1.
2.
3.
4.
5.
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
6. inefficient management of public lands.
34
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.
35
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.
36
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.
37
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.
38
39
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.
40