JDEK17 Economic Development
Spring 2025 - Session B
Deborah Strumsky
Lecture 10
April 29, 2025
Chapter 10 Environment and Development: The Basic Issues
Classic “market failures” lead to extreme amounts of environmental degradation, as do poverty and lack of
education may also lead to non-sustainable use of environmental resources.
A. The pressures to use or sell environmental resources in developing countries can have severe
consequences for self-sufficiency, income distribution, future growth potential, and the fundamental
quality of life. Not just use them, but exploit them beyond what would be normally economically optimal if
market failures were not present.
B. Environmental degradation can also detract from the pace of economic development by imposing high
costs on developing countries through health-related expenses and the reduced productivity of
resources. This makes increasing the growth long run growth rate and achieving economic convergence
with rich countries even harder.
1. Environmental problems have consequences both for health and productivity
2. Loss of agricultural productivity a
nd use of marginal lands the cultivation of marginal land is largely
the domain of lower-income groups, the losses are suffered by those who can least afford them.
3. Prevalence of unsanitary conditions created by lack of clean water and sanitation cause illnesses
4. Dependence on biomass fuels and pollution
5. Airborne pollutants create serious health problems, particularly in children.
6. Being unable to access sanitation and clean water mainly affects the poor the most and is believed
to be responsible for a preponderance of infectious disease worldwide
Chapter 10 Environment and Development: The Basic Issues
The statement:
Classic “market failures” lead to extreme amounts of environmental degradation,
Just as poverty and a lack of education also leads to non-sustainable use
of environmental resources.
What specifically is this referring to?
Negative externalities associated with environmental damage, to the air, water, land and
resources for which there is no cost born by the people or organizations doing the damage.
Externalities that are measured, for example the Social Cost of Carbon, demonstrate that
the burden of these externalities fall disproportionately on the poorest in every society.
For the developing world resource extraction, both the amount and the methods of resource
extraction, are usually unsustainable and impose irreversible damage to the environment,
and often with little benefit to local communities while the work is occurring and with with
massive problem after the organizations leave.
Consider just a few obvious examples...
Chapter 10 Environment and Development: S
ugar Cane Biofuels from Brazil
Chapter 10 Environment and Development: Palm Oil in Indonesia
Chapter 10 Environment and Development: Gold Mining in Africa and South America
In 2020, gold in Ghana contributed 7.8 billion Ghanaian cedis (GHS), roughly 1.3 billion
U.S. dollars, to the country's Gross Domestic Product (GDP). Compared to the other
years under study, this was the lowest value added of the precious metal. The highest
contribution was, however, registered in 2018, at approximately 9.5 billion GHS. Overall,
the contribution of gold to Ghana's GDP fluctuated.
What does it mean to be sustainable from an Economic perspective?
“Sustainable Development” usually defined as:
• “meeting the needs of present generation without compromising the wellbeing of future
generations”
• The environment and resources are modelled as capital stock. Just as we model economies with Labor
and Capital, Y=f(K, L), and economies with more capital per worker are richer because workers are
more productive.
• We know to manage a firm/economy you invest in new capital stock to replace the depreciating capital.
Running down the capital stock, exhausting your environmental resources is not consistent with the
idea of sustainability, or even running a growing economy.
• Overall capital assets are meant to include not only manufactured or Physical Capital (machines,
factories, roads) but also Human Capital (knowledge, experience, skills), and Environmental Capital
(forests, soil quality, rangeland).
• Physical Capital, Human Capital, and Environmental Capital are substitutes only to a degree;
eventually they likely act as complements.
• In developing countries, environmental capital is generally a largest fraction of total capital.
What does it mean to be sustainable from an Economic perspective?
• To know whether Environmental Capital is increasing or decreasing, we need environmental
accounting.
• By this definition, sustainable development requires that these overall capital assets NOT be
decreasing and that the correct measure of Sustainable Net national Income (NNI) is the amount
that can be consumed without diminishing the environmental capital stock.
Sustainable net national income is:
where
NNI* is sustainable national income
GNI is Gross national income
Dm is the depreciation of manufactured capital assets
Dn is the depreciation of environmental capital
What does it mean to be sustainable from an Economic perspective?
If the measure of “development” and the basis
for aid and loans were not GDP, but measures
like NNI.
Imagine the how the rank order of countries
would change?
R is to re-invest and restore the environment, like re-planting forests, managing fisheries, etc.
A is to reduce or avoid destruction like air pollution controls, cleaning water before releasing it back
in to the environment before damage is done. So failure to produce output in a sustainable manner
lowers your output numbers.
What does it mean to be sustainable from an Economic perspective?
It is one thing to think of this on a country-by-country level, now consider it on a global scale?
As population increases, to achieve a Sustainable Net National Incomes you have to choose massive
amounts of re-investment or everyone will experience lower levels of per capita income.
If the planet is a global environmental pie to be divided up, the poor suffer more from environmental
decay because they must often live on the most degraded and polluted lands that are less expensive
because the rich avoid them (or already exhausted them, leaving them to poorer farmers).
Now we tell them go on develop economically!
But they have to match our productive capacity with environmental capital that will never match the
developed world without massively more re-investment.
Then developed countries call them lazy, or they can not manage their economies, they spend too
much on social programs... But, in fact to derive the same environmental benefits and output levels it
requires double, or triple the amount of investment in the all form of capital to compete.
Is possible to reduce environmental destruction by increasing incomes?
Is possible to reduce environmental destruction by increasing the incomes of the poor?
Very poor populations cause considerable environmental destruction as a direct result of their poverty.
It follows that increasing the economic status of the poorest group would provide an
environmental windfall. They could afford more R & A, and increase investment, it would
lessen the environmental destruction and raise productivity.
However, as increased productivity raises incomes, consumption for everyone in the economy
increases, so and you can get a net increase in environmental destruction.
Environmental Kuznets Curve – that as incomes increase you initially get more environmental
damage, but after a certain point as incomes rise, societies will have both the means and the
willingness to pay for environmental amenities (pollution controls, land use policies, clean air and
clean water policies, emissions controls, etc...). This reduces the negative impacts on health and helps
drive productivity, high productivity means new wealth and growing incomes.
Environmental Kuznets Curve
Empirical evidence is mixed.
There is no guarantee that economic growth will
see a decline in pollutants.
Many countries have just gotten more polluted
and degraded as they become rich (China and
India have become richer with exponentially
more environmental damage )
Countries with the highest GDP have highest
levels of CO2 emission, and often just offshore
the damage to poorer countries but allow their
own land to be cleaner.
This is a particular problem when it comes to global public goods, such as greenhouse gases (Tragedy
of the Commons). And, even if environmental Kuznets curve relationships does hold in the long term,
for some items such as loss of biodiversity damage may be irreversible, “tipping points” are very real.
Environmental Relocation
Jakarta
Population ≈ 30 Million
(one of the biggest cities on Earth)
About half the city is below sea
level and it is sinking, and North
Jakarta will be underwater by 2050.
Why?
Ground water depletion and climate
change.
Hurricanes and storms get worse
every year and create massive
flooding that are getting impossible
to recover from before the next
season hits. https://www.cnbc.com/2023/08/28/indonesia-to-move-capital-from-
One of the last pristine rainforests jakarta-to-nusantara-but-it-wont-be-easy.html
on Borneo has been selected as A Short documentary: Moving a Megacity
https://www.google.com/search?rlz=1C2GCEA_enSE1018SE1020&sca_esv=fbc659ff7db8699b&sca_upv=1&sxsrf=ADLYWILfVfmKaOj-
the new home for Jakarta. hRtbrPXBYuahvUwBZg:1715768647461&q=relocating+Jakarta&tbm=vid&source=lnms&prmd=invsbz&sa=X&ved=2ahUKEwjRn_6luI-
GAxVIHBAIHexYAMUQ0pQJegQIDhAB&biw=1920&bih=919&dpr=1#fpstate=ive&vld=cid:879583d3,vid:WVaLSXAsDFU,st:0
Environmental Relocation
Mass migration out of red
zones into green zones.
Prices in green zones will
increase and investment
will take get a premium.
Poor will not be able to
afford to move, and will
bear the higher and
increasing costs of
climate impacts in the red
zones.
Red Zone divestment is
already occurring and
quantifiable.
