Development Economics

1
(No Transcript)
2
13. Natural Resources the Environment

• Sustainable Development
• Importance of Natural Resources
• Land, Natural Resources, Environmental
  Resources
• Petrol

• Sustainable Development
• Importance of Natural Resources
• Land, Natural Resources, Environmental
  Resources
• Petroleum
• Dutch Disease

3
Natural Resources the Environment (continued)

• Resource Curse
• Poverty Environmental Stress
• Grassroots Environmental Action
• Market Imperfections, Policy Failures,
  Environmental Degradation

4
Natural Resources the Environment (continued)

• Pollution
• Arid Semiarid Lands
• Tropical Climates
• Global Public Goods Climate Biodiversity
• Policy toward Global Climate Change
• Limits to Growth
• Dalys Impossibility Theorem

5
Natural Resources the Environment (concluded)

• Natural Asset Deterioration, Adjusted Net
  Savings, the Measurement of National Income
• Adjusting Investment Criteria for Future
  Generations

6
Sustainable Development

• Progress that meets the needs of the present
  without compromising the ability of future
  generations to meet their own needs The 1987 (UN
  (Brundtland) Commission on Environment and
  Development 1987).
• More than survival of the human species.
• Maintenance of the productivity of natural,
  produced, and human assets from generation to
  generation.
• Can physical (produced) capital substitute for
  natural capital? (See Dalys theorem).

7
Land, natural resources environmental resources

• Land Immobile, potentially renewable,
  nonproducible (with exceptions such as Boston
  Mumbais landfills)
• Natural resources--Mobile but nonrenewable
• Resource flowsrenewable energy sources
• Environmental resourcesresources provided by
  nature that are indivisible

8
Petroleum
9
Response to 1973-74 2005 petroleum price
increases

• Short run price elasticity of demand ( change in
  quantity/ change in price) is close to 0.
• Long run elasticities are much higher (slightly
  less than one)
• DCs adjusted better in 2005 than 1973-74
  however, LDCs were badly affected both times

10
TABLE 13-1 indicates leading crude oil countries
(by 2003 production and 2003 estimate proved
crude oil reserves (billions of tons)
11
(No Transcript)
12
Dutch Disease

• A pathology resulting from the way a booming
  resource export retards the growth of other
  sectors through unfavorable effects on the
  foreign-exchange rate and the costs of factors of
  production.

13
Resource Curse

• Resource-abundant economies grow slower than
  other economies (Sachs and Warner 1999 Lal and
  Myint 1996 Auty 2002),
• Oil revenues increased average material welfare,
  widened employment opportunities, and increased
  policy options, but also altered incentives,
  raised expectations, distorted and destabilized
  nonoil output, frequently in agriculture.

14
Resource curse

• A top Nigerian official in 1970s Striking it
  rich on oil was like a man who wins a lottery
  and builds a castle but cant maintain it and
  has to borrow to move out.
• Why?
• Exchange-rate, pricing, investment, and incentive
  policies that Nigeria failed to take to counter
  Dutch disease (Chapter 6)

15
Reverse Dutch disease

• Reverse Dutch disease from oil bust severe,
  especially for those, such as Nigeria or Angola,
  that are highly dependent on oil

16
Is the resource curse valid?

• Resource abundant economies more likely to
  suffer growth collapse, due to higher wages
  obstructing industrialization.
• Neumayer (2003) finds virtually no resource
  curse if you measure GNI accurately. Should
  subtract capital depreciation, natural resource
  depletion, and damage from carbon dioxide
  particulate emissions from national savings
  (Figure 4-2).
• Curse is partly result of unsustainable
  overconsumption in resource-abundant economies
  (as in Nigeria during its oil boom).

17
(No Transcript)
18
Mineral export abundance predatory rule

• Abundance of exportable minerals more likely to
  be associated with poor governance.
• Resource exportables enabled warlords or
  predatory rulers (Liberias Charles Taylor and
  Zaires Mobutu Sese Seko) to support private
  armies without providing public services.
• Predatory economic behavior not viable in
  resource-poor economies, such as Togo.

19
Poverty environmental stress

• People living hand-to-mouth existence more likely
  to destroy their immediate environment (e.g.,
  Nepalese collecting firewood denuded forests on
  the hills mountains).
• Poor, landless people often forced to cultivate
  marginal lands.

20
World Bank (1992) on environment productivity

• Adverse effect of environmental degradation on
  health and productivity
• (1) water pollution scarcity contributes to
  poor household hygiene, added health risks,
  aquifer depletion, limits on economic activity,
  contributing to millions of deaths yearly.
• (2) excessive urban particulate matter
  responsible for 300 to 700 thousand premature
  deaths annually and for half of childhood chronic
  coughing.

21
Environment, health, productivity

• (3) Smoky indoor air affects 400 to 700 million
  people, mostly in poor rural areas.
• (4) Air pollution from factories and vehicles
  affects forests water through acid rain.
• (5) Solid and hazardous wastes polluted
  groundwater increase diseases.
• (6) Soil degradation reduces nutrition for poor
  farmers on depleted soils and increases
  susceptibility to drought.

22
Environment, health, productivity

• (7) Deforestation flooding leads to death and
  disease, increased erosion, reduced carbon
  sequestration.
• (8) Reduced biodiversity reduces new drug and
  genetic resource potential.
• (9) Atmospheric changes increase risks from
  climatic natural diseases, and increase diseases
  from ozone depletion

23
Grassroots environmental action

• Local participation to defend environment
  livelihood can have effect
• Poor with secure long-term user rights will
  behave responsibly toward environment (Broad 1994)

24
Determinants of environmental degradation

• Market distortions government does not set
  conditions for efficient markets
• Defective economic policies Misguided
  government intervention in well-functioning
  markets
• Inadequate property rights

25
Why environmental degradation?

• People maximize profits by shifting costs onto
  others, and appropriate common and public
  property resources without compensation.
• Ultimately, excessive environmental damage can
  be traced to bad economics stemming from
  misguided government policies and distorted
  markets (Panayotou 1993)
• Growth should be derived from increased
  efficiency and innovation not by shifting
  environmental costs to innocent third parties.

26
Determinants of environmental degradation

• Negative externalities economic activities
  conveying direct and unintended costs to other
  individuals firms.
• Common property resources tragedy of the
  commons just as herders cattle overgrazes
  pasture open to all, individuals exploit open
  access resource as if facing an infinite discount
  rate

27
Determinants of environmental degradation

• Public goods with nonrivalry nonexclusion in
  consumption
• Irreversibility resource cannot be reproduced
  in future if fail to preserve it now
• Undefined user rights people will not pay for
  resource without secure exclusive rights.
• High transactions costs Information,
  coordination, bargaining, monitoring,
  enforcement costs may be prohibitively high

28
Coases theorem

• When property rights are well defined
  transactions costs not prohibitive, participants
  will organize their transactions voluntarily to
  achieve efficient (mutually advantageous)
  outcomes
• Works less well with large numbers, or where
  subject to free riding

29
Pollution

• Production and consumption create leftovers or
  residuals that are emitted into the air or water
  or disposed of on land. Pollution of air and
  water is excessive not in an absolute sense but
  relative to the capacity of them to assimilate
  emissions and to the objectives of society.
• Pollution problems result from divergences
  between social and commercial costs

30
Pollution

• Hardins tragedy of the commons takes something
  trees, grass, or fish out of the commons.
• Reverse of tragedy is pollution, which puts
  chemical, radioactive, or heat wastes or sewage
  into the water, and noxious and dangerous fumes
  into the air. Without a clear definition of
  ownership and user rights and responsibilities,
  an economy fouls its own nest (Hardin
  196812441245).

31
Pollution

• Urban air pollution major form of environmental
  degradation. Most serious health problems result
  from exposure to suspended particulate matter
  (SPM), consisting of small, separate particles
  from sooty smoke or gaseous pollutants. Finer
  particulates carry heavy metals, many of which
  are poisonous.

32
Pollution

• Environmental Kuznets curve
• Water shortage caused by a low price (Figure
  13-2)
• Efficient level of pollution emissions based on
  marginal social costs benefits (Figure 13-3)

33
(No Transcript)
34
(No Transcript)
35
Tropical climates

• Why is economic underdevelopment more likely to
  occur in tropical climates? Kamarck (1976)
• No winter kill, so weeds, insect pests
  parasitic diseases that are enemies to crops,
  animals people are not exterminated.
• In the tropics, soil is damaged by the sun, which
  can burn away organic matter kill
  microorganisms, and by torrential rains, which
  can crush soil structure leach out minerals.
• Tropics are hospitable to human disease. At least
  three-fourths of adult population is infected
  with some form of parasite. Infectious,
  parasitic, and respiratory diseases account for
  about 44 of deaths in LDCs but only 11 in DCs.

36
Global Public Goods Climate and Biodiversity

• Public goods are characterized by nonrivalry and
  nonexclusion in consumption.
• Atmosphere biosphere are global public goods
  nations cannot exclude other nations from the
  benefits of their conservation or from the costs
  of their degradation.
• Cannot expect tropical regions to provide global
  public goods, forests, for biodiversity carbon
  sequestration.

37
Greenhouse gases

• Phenomenon by which the earths atmosphere traps
  infrared radiation or heat.
• Smudgepot or greenhouse effect (Schelling).
  (1993465), warming the earths surface and
  keeping it from rising to be replaced by cooler
  air.
• Greenhouse gases include carbon dioxide (CO2),
  methane, nitrous oxide, and water vapor, that
  keep the earth habitable, and chlorofluorocarbons
  (CFCs).

38
Components of greenhouse effect (1990)

• Carbon dioxide (from coal, oil, natural gas, and
  deforestation) 57.
• CFCs depleting stratospheric ozone layer 25.
• Methane (from wetlands, rice, fossil fuels,
  livestock, landfills) 12.
• Nitrous oxide (from fossil fuels, fertilizers,
  and deforestation) 6.

39
(No Transcript)
40
Costs of global climate change from increased
carbon emissions

• Consensus scientific forecast increased
  temperatures of 2.5-5.5 C (4.5-9.9 F) in 21st
  century depending on industrial growth policy
• LDCs parasitic disease, coastal river
  flooding, drought, tropical storms, water
  contamination
• Example heat damage during rice, wheat, corn
  flowering (gt30 C/86 F). Yields may fall by 10
  for 1C increase. Grains in India perhaps
  Philippines already suffering from increased
  temperatures (Sheehy UN Environmental Program)
  

41
Policy approaches

• Green taxes to equate social marginal abatement
  cost and social marginal damage
• Increases price reduces quantity produced of
  coal petroleum, improving economic (social)
  allocation between resources (Figure 13-4)
• Over time, environmental taxes (market correcting
  taxes) could be substituted for some income taxes
  

42
(No Transcript)
43
Policy approaches

• International tradable emission permits (based on
  least cost principles of abatement, preferable
  to Kyoto approach, based on physical targets)
• U.S. needs to join Kyoto Treaty process again but
  insist on green markets with tradable emission
  permits based on market approach

44
Will a shortage of natural resources limit
economic growth in the next half century,
especially in LDCs?

• Yes or no?

45
Limits to growth? Yes.

• Dalys impossibility theorem a U.S.-style high
  mass consumption economy is impossible for 6.5
  billion people
• Present resource flows would allow U.S. living
  standard to 15 of worlds population

46
Limits to growth? Yes

• Humans already use or destroy 25 of earths net
  primary productivity, total amount of solar
  energy converted into biochemical energy through
  photosynthesis of plants minus the energy these
  plants use for their own life (Postel).
• - Georgescu-Roegen producing luxury goods
  with high entropy shortens life span of human
  species.

47
Limits to growth? No.

• Proven reserves, thought to be woefully short,
  represent no more than an assessment of working
  inventory of minerals that industry is confident
  is available during its forward planning period
  (typically 8-12 years) should not be used for
  making long-term projections.
• Critics understate technological change (MIT
  study arbitrarily assumes nonexponential limits
  compared to exponential growth on demand side).

48
International agencies need to subtract
environmental degradation resource depletion
from GNI or GDP

• World Bank has estimated adjusted net savings, a
  component of GNI (Table 13-3)
• Venetoulis Cobb, using Daly, Cobb, Cobbs
  framework estimate Genuine Progress Indicator
  (GPI), showing that GPI per capita peaked in 1976
  (Figure 13-5). Despite large margins of error,
  including environmental depletion variable will
  give us better measures of economic welfare

49
(No Transcript)
50
(No Transcript)
51
Do we need to adjust investment criteria to
consider future generations?

• Markets may not recognize the rights of future
  generations.
• Discount rates of 15 annually mean the present
  value of a dollar 33 years from now is only 1
  cent.
• Norgaard supports legislation to protect species,
  set aside land for parks reserves, establish
  conservation agencies to institutionalize
  protection of the rights of future generations.

52

• A rule of thumb is that 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.
• Dasgupta stresses preserving the future
  generations options.