CH - 13 - Natural Resources & The EnvironmentRM

Chapter 13
Natural Resources
& the
Environment:
Toward Sustainable
Development
CHAPTER 13 ©E.Wayne Nafziger Development Economics

1
Natural Resources &
the Environment
 Sustainable Development.
 Importance of Natural Resources.
 Land, Natural Resources, &
Environmental Resources.
 Petroleum.
 Dutch Disease.
2
Natural Resources & the
Environment (continued)
 Resource Curse.
 Poverty & Environmental Stress.
 Grassroots Environmental Action.
 Market Imperfections, Policy Failures, &
Environmental Degradation.
3
Environment (continued)
 Pollution.
 Arid & Semiarid Lands.
 Tropical Climates.
 Global Public Goods: Climate &
Biodiversity.
 Policy toward Global Climate Change.
 Limits to Growth.
 Daly’s “Impossibility Theorem.”
4
Environment (concluded)
 Natural Asset Deterioration, Adjusted
Net Savings, & the Measurement of
National Income.
 Adjusting Investment Criteria for Future
Generations.
5
Sustainable Development
 “Progress that meets the needs of the present
without compromising the ability of future
generations to meet their own needs.” [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 Daly’s theorem).
6
Land, natural resources &
environmental resources
 Land –Immobile, potentially renewable, &
nonproducible (with exceptions such as
Boston & Mumbai’s landfills).
 Natural resources--Mobile but
nonrenewable.
 Resource flows—Renewable energy
sources.
 Environmental resources—resources
provided by nature that are indivisible.
7
8
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.
9
10
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.
11
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.
12
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] can’t 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).
13
Reverse Dutch disease
 Reverse Dutch disease from oil bust

severe, especially for those, such as
Nigeria or Angola, that are highly
dependent on oil.
14
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 over-
consumption in resource abundant economies
(as in Nigeria during its oil boom).
15
Mineral export abundance &
predatory rule
 Abundance of exportable minerals more
likely to be associated with poor governance.
 Resource exportables enabled warlords or
predatory rulers (Liberia’s Charles Taylor
and Zaire’s Mobutu Sese Seko) to support
private armies without providing public
services.
 Predatory economic behavior not viable in
resource-poor economies, such as Togo.
16
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.
17
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.
cont
18
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.
cont
19
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
20
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).
21
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.
22
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.
23
degradation
 Negative externalities – economic
activities conveying direct and
unintended costs to other individuals &
firms.
 Common property resources – “tragedy
of the commons” – just as herder’s cattle
overgrazes pasture open to all,
individuals exploit open access resource
as if facing an infinite discount rate.
24
degradation
 Public goods – with non-rivalry & non-exclusion
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.
25
Coase’s 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.
26
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
27
Pollution
 Hardin’s “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 1968:1244–1245).
28
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.
29
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).
30
31
32
Tropical climates
Why is economic underdevelopment more likely
to occur in tropical climates? Kamarck (1976).
1. No winter kill, so weeds, insect pests & parasitic
diseases that are enemies to crops, animals & people
are not exterminated.
2. 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.
3. 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.
33
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.
34
Greenhouse gases
 Phenomenon by which the earth’s atmosphere
traps infrared radiation or heat.
 Smudgepot or greenhouse effect (Schelling).
(1993:465), warming the earth’s 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).
35
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%.
36
37
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 (>30 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).
38
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.
39
40
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.
41
Will a shortage of natural
resources limit economic growth
in the next half century,
especially in LDCs?
Yes or no?
42
Limits to growth? Yes.
 Daly’s 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 world’s population.
 Humans already use or destroy 25% of earth’s 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.
43
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).
44
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, &
Cobb’s 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.
45
46
47
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.
48
Do we need to adjust investment criteria
to consider future generations?
 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.
49

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Chapter 13

CHAPTER 13 ©E.Wayne Nafziger Development Economics

 Reverse Dutch disease from oil bust

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