Nafziger Economic Development (4th ed)

The long run in economic analysis tends to be as little as 10–25 years, but for the biologist and geologist the long run is at least several generations. Critics argue that using the economist’s time preference will only hasten the conversion of natural environments into low-yield capital investments. The economist’s investment choice, based on maximizing present value, assumes that current generations hold all rights to assets and should efficiently exploit them. But markets do not necessarily provide for equity between generations. Most depleted mineral and biological wealth, especially biodiversity, is all but impossible to recapture after it is destroyed, thus reducing natural assets in the future. Using conventional investment criteria, in which benefits and costs are discounted at a substantial positive rate of interest, automatically closes off the future. If discounted at 15 percent annually, the present value of a dollar five years from now is $0.50, 16 years from now $0.11, and 33 years from now only $0.01. Moreover, even with a 5 percent discount rate, the output (and survival) of earth’s residents 50 years hence is worth virtually zero. Surely this is absurd.

Economists such as Berkeley, California’s Richard B. Norgaard (1992:27, 37–38, 48) contend that conventional investment criteria, based on meeting this generation’s preference for consumption over time, is not justifiable when the future’s needs are at stake. We need to distinguish between investment for this generation’s time preference and investment to transfer resources and species to future generations. A possible rule of the thumb that considers the preferences of future generations would be one where assets – natural, produced, and human capital – in each time period or generation must be at least as productive as that in the preceding period or generation. Each generation would be obligated to pass on to the next generation a mix of assets that provides the potential for equal or greater flows of income. For Norgaard, this means legislation to protect individual species, set aside land for parks and reserves, and establish social conservation agencies to institutionalize protection of the rights of future generation. Humankind, once meeting the constraint of sustainability, should then select investment projects with the highest social rates of return based on more conventional economic criteria.

John V. Krutilla (1993:188–198) thinks that today’s investment behavior will be motivated by the desire to leave an estate to descendants that will yield collective consumption goods of appreciating future values. Nobel economist Robert Solow (1993:179–187) argues that we need not leave the world as we found it in detail nor should each generation leave undiminished the natural resources and plant and animal species existing on earth, as humans can substitute one input for another in production. In fact, Harvard’s Larry Summers (1992:65) believes that you can use conventional investment criteria if you compute environmental spillovers (external costs and benefits) accurately. If people feel the market does not value the rain forest in the Amazon River basin highly enough, the Brazilian government can set land or user prices, purchase the land for a reserve, tax nearby factories’ pollutants, or request aid from a global environment facility to prevent irreversible damage to the forest’s biodiversity and carbon sequestration.

Although the costs of preserving endangered species and curbing carbon emissions are incurred in the immediate future, many major benefits do not occur until the

Moreover, LDC population growth has been caused by falling mortality rates, not greater fertility (which instead has been dropping). Furthermore, if economic aid to LDCs facilitates development, fertility rate will fall rather than rise (see Chapter 8).

In addition, Hardin’s lifeboat metaphor is flawed. In contrast to Hardin’s lifeboats, which barely interact, nations in the real world interact enormously through trade, investment, military and political power, and so on. His metaphor is not realistic enough to be satisfactory. Hardin must admit that the rich lifeboats are dependent on the poor lifeboats for many of the materials and products of their affluence. Furthermore, the rich lifeboats command a disproportional share of the world’s resources. Indeed, one seat on the lifeboat (that is, access to a given amount of nonrenewable resources) can support 10 times the population from a LDC as from the DC. Daly and Georgescu-Roegen would argue that it is North Americans, not Africans and South Asians, who most endanger the stability of the lifeboat. The average person in the United States, for instance, consumes about 107 times as much energy and emits 45 times as much carbon dioxide per capita as the average citizen of Bangladesh (see the front inside cover table’s last column). Also Hardin fails to acknowledge that the carrying capacity of the planet, unlike that of the lifeboat, is not fixed but can increase with technical change. Indeed, technical assistance can enhance output in the poor countries without hurting the rich countries. Finally, Hardin’s rich lifeboat can raise the ladder and sail away. In the real world, we may not be able to abandon the poor. Rich countries can provide economic aid, including assistance for education, public administration, family planning, and environmental resources, particularly global public goods (see earlier this chapter and Chapter 15).

Conclusion

1.Land and natural resources are distinguishable. Land is immobile and potentially renewable. Natural resources are mobile, but most are nonrenewable.

2.Environmental resources are resources provided by nature that are indivisible.

3.Oil crises in the 1970s worsened the balance of trade deficit, debt burden, and inflation rate and slowed the growth rate of oil-importing LDCs, but the oil glut in the 1980s and early 1990s reduced these problems for some oil importers.

4.Dutch disease is the adverse competitive effect that local currency appreciation due to a booming export sector has on other exports and import substitutes.

5.Sustainable development refers to maintaining the productivity of natural, produced, and human assets from generation to generation. Norgaard argues that conventional investment criteria are not adequate for considering the consumption needs of future generations.

6.Panayotou contends that environmental degradation originates from market distortions, defective economic policies, and inadequate property rights definitions, meaning that environmental problems are basically economic problems.

7.External diseconomies, overuse of an open access resource, underproduction of public goods, the irreversibility of rare phenomena of nature, murky owner and user rights to an asset, and high transactions costs are market imperfections that contribute to environmental degradation. Pollution problems result from

460 Part Three. Factors of Growth

divergences between social and commercial costs. These divergences even occur under socialism; indeed, the Soviet Union’s ruthless treatment of land, air, and water illustrate how everybody’s property may become nobody’s property.

8.The efficient level of pollution emission is where marginal damages are equal to marginal abatement costs.

9.Contingent valuation is the use of questionnaires from sample surveys to elicit the willingness of respondents to pay for an environmental good. Many economists regard contingent evaluation as deeply flawed.

10.About 14 percent of the world population lives on arid or semiarid land. Increases in arid lands in the last several decades are traceable to overcultivation, deforestation, and so forth.

11.Economic underdevelopment in the tropics is partly a matter of geography. There is no winter to exterminate weeds and insect pests. Parasitic diseases are endemic and weaken the health and productivity of people. The heat and torrential rains damage the soils, removing needed organic matter, microorganisms, and minerals.

12.Tropical countries generally will not provide global public goods, such as the atmosphere or biosphere, in sufficient quantity, because many benefits spill over to other countries. Rich countries have an interest in providing funds to preserve tropical global common-property resources. However, because they may earn higher returns from free riding, users of global common property resources rarely agree to commit resources to manage global resources in the interest of all.

13.Developed and transitional countries produce a disproportional share of the world’s carbon dioxide emissions that contribute to global warming. In the absence of drastic cuts in the annual global emissions of carbon dioxide, scientists expect increases in globally averaged surface temperatures in the 21st century that are several times these increases in previous centuries. The developing countries of the south are expected to be the major nations suffering from global warming, even though they produce only a small fraction of the globe’s carbon emissions.

14.Market-based “green taxes” are more efficient than physical targets in reducing carbon emissions. Many economists think that international tradable emission permits are the economically optimal approach to levying “green taxes” on carbon emitters.

15.The Club of Rome’s study, The Limits to Growth, concluded that the global economic system will collapse during the 21st century. However, a major shortcoming of the study is the assumption of exponential growth in industrial and agricultural needs and the arbitrary placement of nonexponential limits on the technical progress that might accommodate these needs.

16.Daly’s impossibility theorem argues that there are not enough resources in the world to support the whole world at U.S.-style consumption levels.

17.Our continuous use of natural resources increases entropy, a measure of the unavailable energy in a thermodynamic system. Georgescu-Roegen argues that luxury production decreases the expected life span of the human species.

462Part Three. Factors of Growth

3.What is meant by “sustainable development”? What implications should sustainable development have for investment criteria?

4.What are the market imperfections that contribute to environmental degradation?

5.What is meant by Hardin’s “tragedy of the commons”? Identify environmental problems associated with this tragedy.

6.Theodore Panayotou contends that “Ultimately, excessive environmental damage can be traced to ‘bad’ economics stemming from misguided government policies and distorted markets.” Discuss what Panayotou means by this statement, how accurate his view is, and what the policy implication of this view is. Give examples of misguided government policies and distorted markets, and the reasons for these policies and markets.

7.How do pollution levels vary with economic growth?

8.What decision-making rule minimizes social cost when pollution is involved? Assess the position that optimal level of pollution emission is zero.

9.Discuss and assess the methods for estimating the monetary values of pollution discharge and ecological degradation.

10.How does geography affect economic development in the tropics? What measures are needed to overcome these adverse effects?

11.Discuss the concept of global public goods, give examples of those that have environmental implications, and indicate the implications of global public goods for international funding programs. In your analysis, focus especially on global public goods in tropical countries.

12.What program would you design for global optimal greenhouse-gas abatement?

13.Assess the arguments for and against the use of international tradable emission permits in abating global greenhouse gases.

14.Discuss the role of green markets, green taxes, and green aid in reducing market imperfections concerning the environment and resource use. Discuss the possibility of using green markets, green taxes, and green aid in multilateral agreements.

15.How severely will a shortage of natural resources limit economic growth in the next half-century, especially in LDCs?

16.Indicate the adjustments the World Bank makes to arrive at adjusted net savings.

17.Indicate the adjustments made to compute the Genuine Price Indicator (GPI). How do these adjustments affect measures of net economic welfare? Evaluate GPI as a measure of economic welfare as an alternative to gross product per capita.

GUIDE TO READINGS

The World Bank (2004f) and subsequent Global Economic Prospects provide data on changes in petroleum prices.

Roemer (1985:234–252), Findlay (1985:218–233), and Corden and Neary (1982:825–848) examine Dutch disease in LDCs. The IDS Bulletin 17 (October 1986) has three articles dealing with Dutch disease:

The annual Vital Signs and State of the World by the Worldwatch Institute, and World Resources Institute, U.N. Environmental Program, and the U.N. Development Program (1994 and subsequent years) provide information on the relationship among the world’s resources, environment, and population, and assess the sustainability of the planet. All sources, especially the last, discuss the global public goods of climate and biodiversity. Wilson (1989:108–110) and Miller, Reid, and Barber (1993) are sources on biodiversity. Schelling (1993:464–483), Poterba (1993:47– 63), Weyant (1993:27–46), Nordhaus (1993:11–25), Morgenstern (1993:140–145), Mendelsohn, Nordhaus, and Shaw (1994:753–771), and Nordhaus and Boyer (2000) have economic analysis and policy recommendations concerning the problem of global climate change. Gore (1993) has analyses, tables, and figures on global warming of interest to lay readers. Barrett (1993:445–463) discusses the pitfalls associated with international environmental agreements. Kaul, Conceicao, Le Goulven, and Mendoza (2003) include essays on the concept and policy implications of global public goods.

The World Bank (1992i) analyzes the effect of environmental degradation on health and productivity in LDCs. Dasgupta (2001) examines how the natural environment affects human well-being.

Daly (1991:182–189), Solow (1993:179–187), and Goldin and Winters (1995) apply rigorous economic analysis to the question of sustainable development.

Dorfman and Dorfman’s edited readings (1993) on the environment are excellent in discussing economic principles, policies, benefit–cost analysis and measurement, and a global analysis related to the environment. Other excellent survey sources on environmental economics include Kahn (1995), Field (1994), and Turner, Pearce, and Bateman (1993). Field (1994:84–105) analyzes the marginal conditions for optimal pollution abatement.

Panayotou (1993) has a clear and concise explanation of market distortions and policy failures that are the root causes of severe environmental degradation. Ghai and Vivian (1983) examine the management of environmental resources on the local level in LDCs.

Hardin (1968) has written the classic essay on the “tragedy of the commons.” Randall (1993:144–161), has a comprehensive analysis of market imperfections that contribute to environmental degradation. Dales (1993:225–240) discusses the role of ownership and user rights in reducing environmental damage.

The Journal of Economic Perspectives (Fall 1994) has a concise summary of the literature on contingent valuation, including articles by Hanemann, Portney, and Diamond and Hausman.

Kaul, Conceicao, Le Goulven, and Mendoza (2003) and Ferroni and Mody (2002) define international public goods and discuss incentives for and management of their provision.

Feshbach and Friendly (1991) have an exhaustive survey of environmental degradation in the former Soviet Union.

Kamarck (1976) has written the definitive study on economic development in the tropics. Diamond (1999), discussed in Chapter 3, uses ecology and evolutionary

464Part Three. Factors of Growth

biology to explain the fates of sub-Saharan Africa and other human societies and their development.

Norgaard (1992) discusses the effect of environmental public goods and bads on investment criteria.

Does scarcity of natural resources place substantial limitations on future economic growth? Although the best-known analyses of the yes answer to this question are studies by Meadows et al. (1972, 1992), the arguments by Daly (1977) and GeorgescuRoegen (1971) are more compelling. On the negative side of this question is Simon (1979:26–30, 1981, 1986). Clear, concise expositions for the two sides, written for the lay reader, are Georgescu-Roegen (1971b) and Simon (1981a:33–41).

On ways to measure economic welfare that include environmental degradation and resource depletion, see World Bank (2003i:15–17), Daly, Cobb, and Cobb (1994), and Cobb, Glickman, and Cheslog (2001).

William Nordhaus and the Nobel laureate James Tobin (1972) were pioneers in proposing an indicator, Measure of Economic Welfare (MEW), that was a forerunner of GPI. MEW is GNP minus pollution and intermediate goods such as national security plus consumption of leisure and household production and other nonmarket activity.