British Academy: The UK's National Academy for the Humanities and Social Sciences

Partha Dasgupta: 'The Economics of the Environment'
Copyright © The British Academy, 1996
Printed in Proceedings of the British Academy, Volume 90, pp. 165-221

3. Poverty and Institutional Failure as Causes of Environmental Degradation

The early literature on ecological economics identified market failure as the underlying cause of environmental problems (Pigou, 1920; Lindahl, 1958; Arrow, 1971; Meade, 1973; Mäler, 1974; Baumol and Oates, 1975; Dasgupta and Heal, 1979). Here, by markets I mean institutions that make available to interested parties the opportunity to negotiate mutually advantageous courses of action. But in order that someone is able to negotiate, they need to know the extent to which they are empowered to negotiate, the extent to which the other parties are empowered to negotiate, and so on. In other words, for you to be able to negotiate, you need to know what you can negotiate with, what the other parties can negotiate with, and so forth. So it should come as no surprise that the functioning of markets is linked closely to the structure of property rights. This observation was the starting point of early ecological economics.

Thus, it was noted by authors that for many environmental resources markets simply don't exist. In some cases they don't exist because the costs of negotiation are too high. One class of examples is provided by economic activities that are affected by ecological interactions involving long geographical distances (e.g. the effects of deforestation in the uplands on downstream activities hundreds of miles away; Section 4); another, by large temporal distances (e.g. the effect of carbon emission on climate in the distant future, in a world where forward markets are non-existent because future generations aren't present today to negotiate with us). [note 9 (go to Notes)] Then there are cases (e.g. the atmosphere and the open seas) where the nature of the physical situation (viz. the migratory nature of the resource) makes private property rights impractical and so keeps markets from existing; while in others (e.g. bio- diversity; see Perrings et al., 1994), ill-specified or unprotected property rights prevent their existence, or make them function wrongly even when they do exist.

In each of these cases the market prices of goods and services fail to reflect their social scarcity-values. For example, the market price of a number of environmental resources, in situ, is zero, even though they are limited in supply. In short, laissez-faire economies are often not much good at generating public signals of a kind that would reflect social scarcities of environmental services. This has been a recurring theme in ecological economics. In Section 9 I will suggest ways of estimating social scarcity-values of such services.

Thus far, market failure. Recently, certain patterns of environmental deterioration have been traced to government failure, not market failure. For example, Binswanger (1989) has argued that, in Brazil, the exemption from taxation of virtually all agricultural income (allied to the fact that logging is regarded as proof of land occupancy) has provided strong incentives to the rich to acquire forest lands and to then deforest them. He has argued that the subsidy the government has thereby provided to the private sector has been so large, that a reduction in deforestation is in Brazil's interests, and not merely in the interest of the rest of the world. This has implications for international negotiations. The current consensus appears to be that, as a country, Brazil has much to lose from reducing the rate of deforestation she is engaged in. If this were true, there would be a case for the rest of the world to subsidise her, as compensation for losses she would sustain if she were to restrain herself. But, as Binswanger's account suggests, it isn't at all clear if the consensus is correct.

This said, it is important to note that the causes of environmental problems are not limited to market and government failure; they also arise because such micro- institutions as the household can function badly. In poor communities, for example, men typically have the bulk of the political voice. We should then expect public investment in, say, environmental regeneration to be guided by male preferences, not female needs. On matters of afforestation in the drylands, for instance, we should expect women to favour planting for fuelwood and men for fruit trees, because it is the women and children who collect fuelwood, while men control cash income (and fruit can be sold in the market). This explains why, even as the sources of fuelwood continue to recede, fruit trees are often planted.

Taken together, these examples reflect the environmental consequences of institutional failure. They have a wide reach, and in recent years they have often been discussed within the context of the thesis that environmental degradation, such as eroding soil, receding forests, and vanishing water supplies, is a cause of accentuated poverty among the rural poor in poor countries. There is truth in this. But there is also much accumulated evidence that poverty itself can be a cause of environmental degradation (Dasgupta, 1993; Dasgupta and Mäler, 1995; Ehrlich, Ehrlich, and Daily, 1995). This reverse causality arises because some environmental resources (e.g. ponds and tanks) are essential for survival in normal times, while others (e.g. forest products) are a source of supplementary income in times of acute economic stress. This mutual influence can offer a pathway along which poverty, environmental degradation (and even high fertility) feed upon one another in a synergistic manner over time (Dasgupta, 1993, 1995a,b). The recent experience of sub-Saharan Africa would seem to be an illustration of this (Cleaver and Schreiber, 1994). Indeed, an erosion of the environmental resource-base can make certain categories of people destitutes even while the economy's gross national product (GNP) increases.

These two causes of environmental degradation (namely, institutional failure and poverty) pull in different directions and are together not unrelated to an intellectual tension between the concerns people share about an increased greenhouse effect and acid rains, that sweep across regions, nations and continents; and about those matters (such as, for example, the decline in firewood or water sources) that are specific to the needs and concerns of the poor in as small a group as a village community. Environmental problems present themselves differently to different people. In part, it is a reflection of the tension I have just noted and is a source of misunderstanding of people's attitudes. Some people, for example, identify environmental problems with population growth, while others identify them with wrong sorts of economic growth (Sections 7 and 10). Then there are others who view them through the spectacle of poverty. Each of these visions is correct. There is no single environmental problem; rather, there is a large collection of them. Thus, growth in industrial wastes has been allied to increased economic activity; and in industrialised countries (especially those in the former Socialist block), neither preventive nor curative measures have kept pace with their production. Moreover, the scale of the human enterprise, both by virtue of unprecedented increases in the size of the world's population and the extent of economic activity, has so stretched the capabilities of ecosystems, that humankind can today rightly be characterised as the earth's dominant species. These observations loom large not only in ecological economics, but also in the more general writings of environmentalists and in the professional writings of ecologists in the West. For example, Vitousek et al. (1986) have estimated that 40 per cent of the net energy created by terrestrial photosynthesis (i.e. net primary production of the biosphere) is currently being appropriated for human use. To be sure, this is a rough estimate. Moreover, net terrestrial primary production isn't exogenously given and fixed; it depends in part on human activity. Nevertheless, the figure does put the scale of the human presence on the planet in perspective.

On the other hand, economic growth itself has brought with it improvements in the quality of a number of environmental resources. The large-scale availability of potable water, and the increased protection of human populations against both water- and air-borne diseases in industrial countries, have in great measure come in the wake of growth in national income these countries have enjoyed over the past 200 years or so. Moreover, the physical environment inside the home has improved beyond measure with economic growth. For example, cooking in South Asia continues to be a central route to respiratory illnesses among women (see also Section 7 for further examples). Such positive links between economic growth and environmental quality often go unnoted by environmentalists in the West. I would guess that this lacuna is yet another reflection of the fact that it is all too easy to overlook the enormous heterogeneity of the earth's environmental resource-base, ranging as it does from the atmosphere, oceans, and landscapes to water-holes, grazing fields, and sources of fuelwood. This heterogeneity needs constantly to be kept in mind.

More: 4, Markets and their Failure: Unidirectional Interactions
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