CHAPTER FOUR

THE ENVIRONMENT AND DEVELOPMENT

In recent years, economists have become aware of the important implications of environmental issues
for the success of development efforts. Environment is expected to influence economic development in
a number of ways. Some of the major ways by which environment can influence development include:

 Availability of rainfall and underground water for rain fed and agrarian economy
 Presence of conducive working environment in terms of temperature
 Availability of economic resources such as forest etc.

These are highly interrelated with environment and they are believed to have significant effect on
growth and development of an economy. Accordingly, recently, much emphasis is being given for pro-
environmental orientations. In this chapter, we deal with some basic issues regarding environment and
development, the scope of environmental degradation, traditional economic models of environment
and, urban development and the environment.

4.1. Environment and Development: The Basic Issues

The relationship between environment and development can be dealt through seven basic issues. These
include:

 The concept of sustainable development

 Environment, population and resources
 Environment and poverty
 Environment and economic growth
 Environment and rural development
 Environment and urbanization
 Environment and the global economy

4.1.1. Sustainable Development and Environmental Accounting

Sustainability refers to meeting the needs of the present generation without compromising the needs of
the future generations. For economists, a development path is sustainable if and only if the stock of
overall capital assets remains constant or rises overtime. Implicit in these statements is the fact that
future growth and quality of life are critically dependent on the quality of the environment. It is
therefore important that development policy makers incorporate some form of environment accounting
into their decisions.

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Hence, according to David Pearce and Jeremy Warford, the correct measure of sustainable national
income or sustainable net national product is the amount that can be consumed without diminishing the
total capital stock. Symbolically,

NNP* = GNP – Dm – Dn

Where: NNP* is sustainable net national product

GNP is gross national product

Dm is the depreciation of manufactured capital

Dn is the depreciation of environmental capital

An even better measure, though difficult to calculate with present data collection methods, would be:

NNP* = GNP – Dm – Dn – R – A

Where: R is expenditure required to restore environmental capital

A is expenditure required to avert destruction of environmental capital

4.1.2. Population, Resource and the Environment

Much of the concern over environmental issues stems from perception that we may reach a limit to the
number of people whose needs can be met by the earth’s finite resources. This is because, rapidly
growing populations have led to land, water and fuel wood shortage in rural areas and to urban health
crises stemming from lack of sanitation and clean water. In many of the poorest regions of the globe, it
is clear that increasing population density contributed to severe and accelerating degradation of the
very resources that these growing populations depend on for survival. To meet expanding LDC needs,
environmental devastation must be halted and the productivity of existing resources stretched further
so as to benefit more people. If increases in GNP and food production are slower than population
growth, per capita level of production and food self – sufficiency will fall. However, ironically, the
resulting persistence of poverty would be likely to perpetuate high fertility rates, as it was discovered
that the poor are often dependent on large families for survival.

4.1.3. Poverty and the Environment

In LDCs, it is observed that high fertility may seem a means to get out of poverty for a household.
However, high fertility is socially blamed for problems attributable to poverty itself due to
environmental destruction. This reflects the vicious circle of poverty resulting from environmental
destruction. For example, China’s population density per acre of arable land is twice that of India, yet
yields are also twice as high. Thought it is clear that environmental destruction and high fertility go hand
in hand, they are both direct outgrowths of a third factor, absolute poverty. Hence, for environmental

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policies to succeed in developing countries, they must first address the issues of landlessness, poverty
and lack of access to institutional resources.

4.1.4. Growth versus the Environment

There are two contradicting views regarding the impact of economic growth on environment. Some
claim that economic growth has a tendency to affect the environment adversely for the fact that an
economic growth is associated with exploitation of the existing natural resources. On the other hand,
others claim that economic growth can enhance environmental protection resulting from an increase in
income of the people which induces them to give much care for the environment. However, empirical
evidences reveal that the worst perpetrators of environmental destruction are the billion richest and
billion poorest people on earth. In other words, very much lower income earners and those with very
much higher income are expected to be more responsible for the increasing environmental destruction.
It has even been suggested that the bottom billion are more destructive than the rest of the people.

It follows that increasing the economic status of the poorest group would provide an environmental
wind fall. However, as the income and consumption levels of everyone else in the economy also rise,
there is likely to be a net increase in environmental destruction. Hence, meeting the increasing
consumption demand of the people, while keeping environmental degradation at minimum level, is not
a small task.

4.1.5. Rural Development and the Environment

Because land in many areas of the developing world is being unsustainably over exploited by existing
populations, meeting their output needs requires radical changes in the distribution, use and quantity of
resources available to the agricultural sector. And because women are frequently the caretakers of the
rural resources such as forests and water supplies and provide much of the agricultural supply of labor,
it is of primary importance that they be integrated into environmental programs. In addition, poverty
alleviation efforts must target women’s economic status in particular to reduce their dependence on
unsustainable methods of production.

The increased accessibility of agricultural inputs to small farmers and the introduction of sustainable
methods of farming will help create attractive alternatives to current environmentally destructive
patterns of resource use. Land-augmenting investments can greatly increase the yields from cultivated
land and help ensure future food self-sufficiency.

4.1.6. Urban Development and the Environment

Rapid population increases accompanied by heavy rural-urban migration is leading to unprecedented

rates of urban population growth. Consequently, few governments are prepared to cope with the vastly
increased strain on existing urban water supplies and sanitation facilities. The resulting environmental

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ills pose extreme health hazards for the growing numbers of people exposed to them. Such conditions
threaten to precipitate the collapse and national health crises. These conditions are exacerbated by the
fact that much urban housing is illegal. This makes private households investments risky and renders
large portions of urban populations ineligible for government services.

Congestion, vehicular and industrial emissions and poorly ventilated household stove also inflate the
tremendously high environmental costs of urban crowding. Lost productivity of ill or diseased workers,
contamination of existing water sources, and destruction of infrastructure, in addition to increased fuel
expenses incurred by peoples having to boil unsafe water, are just a few of the costs associated with
poor urban conditions. Research reveals that the urban environment appears to worsen at a faster rate
than urban population size increases so that the marginal environmental cost of additional residents
rises over time.

4.1.7. The Global Environment

As total world population grows and incomes rise, net global environmental degradation is likely to
worsen. Some trade-offs will be necessary to achieve sustainable world development. Because many
essential changes require substantial investments in pollution abatement technology and resource
management, significant trade-offs between output and environmental improvements will occasionally
become necessary. But, the poorer the country, the more difficult it will be to absorb these costs. In the
absence of substantial assistance to low-income countries, environmental efforts will necessarily have to
be funded at the expense of other social programs, such as education, health services and employment
schemes, that themselves have important implications for the preservation of the global environment.

Exactly what sacrifices need to be made and who should make them will continue to be matters of great
controversy. Most cumulative environmental destruction to date has been caused by the developed
world. However, with high fertility rates, rising average incomes, and increasing inequality in the
developing world, this pattern is likely to reverse some time in this century. It is thus unclear how the
costs of global reform should be divided. Apportionment of responsibility for reducing environmental
damage essentially hinges on the manner in which the question is framed. For example, if a limit is
placed globally on levels of per capita pollution emissions, the approach would clearly favor lower-
income countries. Conversely, if international pressures try to limit the growth rate of per capita
emissions, they would tend to freeze incomes in developing world.

4.2. The Scope of Environmental Degradation

The principal health and productivity consequences of environmental damage in developing world were
empirically estimated to show the extent of environmental degradation in the area. In the 1980s, per
capita levels of arable land fell by 1.9% annually, leading to worsening land shortages, which have forced
many of the poorest onto marginal land with extremely limited cultivability. It is estimated that over
60% of the poorest peoples residing in developing countries struggle for survival on agriculturally

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marginal soils. The growing intensification of cultivation on fragile lands leads to rapid soil degradation
and loss of productivity. Roughly 270000 square kilometers of soil loss virtually all of their productivity
each year. An area greater than the size of India and China combined, over 1.2 billion acres, has been
significantly degraded. The resulting annual loss in agricultural productivity is estimated to be between
0.5% and 1.5% of annual worldwide GNP. As a result of rapid population increases and failure of
agricultural production to keep pace, per capita food production declined in 69 countries during 1980s.

Estimates also show that the prevalence of unsanitary conditions created by the lack of clean water and
sanitation in urban areas in turn contributes greatly to the spread of infectious disease. Water borne
pathogens (that contribute to typhoid, cholera, amoebic infections, bacillary dysentery, and diarrhea)
account for 80% of all disease in developing countries and at least in part up to 90% of the 13 million
child deaths each year.

Rapid population growth and heavy rural-urban migration make it difficult to extend urban services to
many people who need them. For example, to provide clean water to all urban dwellers in Latin
American cities by 2030 (the numbers served by public facilities) will have to be increased by 250%.
Though, this figure itself is staggering which excludes the 1.2 billion rural individuals whose needs must
be met. On average, throughout the developing world, 72% of all new urban households are located in
shanties or slums. In Africa, the proportion is even greater, at 95%, most of which have no access to
public services.

Air borne pollutants also take high toll on the health of citizens in developing countries. The burning of
biomass fuels for cooking and the boiling of water create dangerously high levels of indoor pollution to
which 400 million to 700 million people, mostly women and children, are exposed each year. Smoke and
fumes from indoor stoves are believed to contribute significantly to up to 4.3 million childhood deaths
from respiratory diseases and to an ever-larger number of chronic respiratory illnesses.

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4.3. Traditional Economic Models of the Environment

4.3.1. Privately Owned Resources

Neoclassical theory has been applied to environmental issues to determine what conditions are
necessary for the efficient allocation of resources. Finding the optimal market outcome involves
maximizing the total net benefits to society from a resource which is the difference between the total
benefits derived from a resource and the total costs to producers of providing it. Total net benefit is
maximized when the marginal cost of producing or extracting one more unit of the resource is equal to
its marginal benefit to the consumer. This occurs at Q* where the demand and supply curves intersect in
a perfectly competitive market. The marginal cost curve in figure 4.1 is upward-sloping because
extraction costs increase as a resource becomes more scarce. The resulting producer surplus is area aPb
and the consumer surplus is area DPb. Together, they yield a maximum net benefit equal to Dab. In
principle, some of these scarcity rents (net benefits) could be taxed and used for environmental
protection or other socially useful purposes.

Marginal benefit and cost

D MC

P b

a Fig 4.1 Static Efficiency in Resource Allocation

0 Q* Units of resource

If resources are scarce and are rationed over time, scarcity rents arise even when the marginal cost of
production is constant, as shown in figure 4.2. The owner of a scarce resource has a finite volume of a
resource X to sell (75 units) and knows that by saving a portion of it for the future sales; she can charge a
higher price today. The price of a good that is being rationed inter-temporally (over time) must equate
the present value of the marginal net benefit of the last unit consumed in each period. That is, the
consumer must be indifferent between obtaining the next unit today or tomorrow.

Price D

Ps a

P b MC

a Fig 4.2 Optimal Resource Allocation Overtime

0 50 75 Quantity

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In figure 4.2, assume that a resource owner has 75 units available. If she is willing to offer only 50 units
for sale today, the market price for the scarce resource is P s. The scarcity rent collected by the owner of
the resource is equal to area PsabP. In the absence of scarcity, all of the resource will be sold at the
extraction cost P=MC. 75 units will be consumed at one time and no rents will be collected.

The proponents of neoclassical free-market theory stress that, inefficiencies in the allocation of
resources result from impediments to the operation of the free market or imperfections in the property
rights system. So long as all resources are privately owned and there are no market distortions,
resources will be allocated efficiently. Perfect property rights markets are characterized by four
conditions:

1) Universality: all resources are privately owned

2) Exclusivity: it must be possible to prevent others from benefiting from a privately owned
resource
3) Transferability: the owner of the resource may sell the resource when desired
4) Enforceability: the intended market distribution of the benefits from resources must be
enforceable

Under these conditions, the owner of a scarce resource has an economic increase to maximize the net
benefit from its sale or use. For example, a farmer who owns his land will choose the levels of
investment, technology and output that maximize the net yield from the land. Because the value of the
land may be used as collateral, any viable on farm investment can be financed by obtaining a loan at the
prevailing market rate of interest.

4.3.2. Common Property Resources

Suppose for the moment that title to a piece of land is privately held. Conventional wisdom tells us that
the land owner will hire additional labor to work that land until the marginal product of the last worker
is equal to the market wage, W, at point L*. The workload is shared equally among the employees, each
of whom produces the average product. However, assuming decreasing returns to labor, each new
worker hired reduces the average product of all workers.

Return to labor

AP

AP* C

W D W Fig 4.3 Common Property Resources and Misallocation

0 L* Lc Number of laborers

MP

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The marginal product of each additional worker is thus equal to his average product minus the decrease
in the average product across all other workers. If an additional employee is hired beyond L*, his cost to
the producer, W will be greater than his marginal product, and the difference will represent a net loss to
the land owner. A profit maximizer will thus hire L* workers, with a total output equal to average
product AP* multiplied by the number of workers, L*. Scarcity rents collected by the landowner will
equal AP*CDW.

Generally, if land is commonly owned, each worker is able to appropriate the entire product of his work,
which is equal to the average product of all workers. Worker income will continue to exceed the wage
until enough workers are attracted so that the average product falls to the level of the wage, at which
point the labor force equals Lc. Though total farm output may either rise or fall (depending on whether
MP is positive or negative), the marginal product of the additional worker is below the wage. Because
we are assuming that all workers could be employed elsewhere with productivity equal to or greater
than W, it follows that social welfare must fall when marginal product falls below W. The implication of
the common property resource model is that, where possible, privatization of resources will lead to an
increase in aggregate welfare and an efficient allocation of resources.

It should be noted that these neoclassical models are strictly concerned with efficiency and do not
address issues related to equity. Although neoclassical theorists have sometimes suggested that an
optimal outcome may be achieved through the taxation and then “lump sum” distribution of the gains
accruing to the owners of scarce natural resources, the historical record for such efforts is not
encouraging. This is especially true where the authorities responsible for legislating and coordinating
such redistributions are also the owners.