You are on page 1of 19


East Asia economy nowadays:

HPAEs: miraculous growth 65-90 => East Asia Miracle.
Rapid and sustain growth: >6% p.a. with low inflation.
Grow 2 times faster than rest of East Asia, 3 times than Latin and South
Per capita increase 2-4 times.
Drastic dropped in poverty.
Income inequality dropped in Japan and the 4 tigers.
Asian countries shift from agriculture to non-agriculture from industry to
3 stages of development nation: agriculture predominates => industrial
sector => service sector catch up.
GDP rise => share of agriculture in GDP fall => share in industry,
manufacturing, services of GDP rise.
Sources of Asian growth:
1. Krugman thinks that Asia miracle is not miracle at all: There are
many parallel between the rise of Soviet Union and the rise of Asian
economy. The slowdown of Soviet Union is explained by 2 points:
Soviet only has ability to mobilize resources, not use them efficiently.
Input driven growth is inherently limited process.
Asian growth seems to be driven by extraordinary growth in inputs like labor
and capital rather than use them efficiency.
Singapore: in 66-90s, Singapore grow 8,5 p.a., 3 times as fast as US.
o Through mobilization of resources (machinery, infrastructure,
education), not increase efficiency: education standard of workforce
upgraded sig., investment in physical capital,
Cannot be repeated.
Can be explained by increase in input
There is startlingly little evidence of improvements in efficiency.
The economic growth in NIC of East Asia has influenced the
conventional wisdom about both economic policy and geopolitics.
Contribution to East Asia success:
1. High saving rate: High growth rates stimulus high saving. Government
play important role in mobilizing saving.
2. Reduce technology gap by investing huge investment in human capital,
educate skilled worker + technological advanced investment.

3. Rapid growth associated with rapid capital accumulation is in turn

associated with high degrees of inequality => that growth would be
accompanied by an increase in the degree of inequality.
The rapid growth of asian raise 2 questions: what policies and other factors
contributed to that growth? Can other developing countries follow to stimulate?
Many studies of Krugman, Kim Lai, offer important lesson: policies that
increase the accumulation of physical and human capital are likely to lead to
more rapid growth.
(Stiglitz) East asian Miracle has many lessons: the use of incentive and
organizational design within public sector to enhance efficiency and reduce
corruption => sustain success.
Making society function better: economic growth require the maintenance
of macro and political stability => better business climate and effective
use of human resources.
Adaptability of gov policies: adapt to changing eco circumstances.
Gov and market: Gov create market institution to make market more
efficiency => ensure that high saving is invest effectively.
Promoting accumulation of physical and human capital:
Altering allocation of resources: support industry => attract FDI and
domestic investors. Encourage firm to export.
Gov supporting investment: Gov intervention in international eco relations
may enhanced national interest, saving, promoted stability.
1. Worldbank (93): allocate physical + human resources to highly productive
investments + master technology + government intervention.
High rate of I => encourage I:
o Business-friendly environment: from tax policies favoring I +
policies (avoid high tariff on imported capital goods) =>
keep capital goods price low.
o Creating infrastructure complementary to private I.
o G intervened deposit + lending rates higher than market
clearing levels.
Domestic Saving:
o Monetary policy => avoid inflation + high rir.
o Access Banking facilities easily => promote growth of
o G control + rise saving rates
Human capital:
o Base: level human capital higher than low + middle income
=> focus on primary + secondary.
o Improve quality.
o G subsidy and support entrepreneur training program.
o Focus on acquisition and acquire tech for education

2. Lee +Hong find that robust growth in East Asia mainly by capital
accumulation: labor input, edu, tfp : positive. To continue growing => rise
rate of factor accumulation + raise productivity.
3. The growth in East Asia can be explained by neoclassical growth model
=> role of human capital + tech catch up.
4. Sachs et al. (2001) find that East Asias rapid growth was due to its
large potential for catching up;
favorable geography and structural characteristics;
(iii) demographic dividend
(iv) economic policies (openness) and strategy that were conducive to

1. Conditional convergence hypothesis: a country with low initial income per

capita relative to its own long-run (or steady-state) potential level of
income per capita will grow faster than a country that is already closer to
its long-run potential level of output per capita.
Poorer countries tend to grow faster than richer, poorer tend to catch
up => grow more quickly.
However, it is project to be slower in the future, 3 decades truoc th
fast, 2 decades sau th chm.

TFP: factor contribute more to GDP in next 2 decades: VN, malay, korea,
indo, tha, Philip.
Capital stock: used to be major sources , marginal productivity of capital
declines => fall.

Economists attempting to understand the sources of East Asias growth

tend to fall in 2 camps: Fundamentalists and Assimilationists.
Fundamentalists (e.g. Paul Krugman): Growth was mainly input driven.
The efficient allocation of resources played a big part in the success
story. Input driven growth is not sustainable because there are limits to
efficient resource allocation and because incremental growth in inputs
is subject to diminishing returns.
Assimilationists (e.g. Paul Romer): Growth was mainly driven by the
acquisition and mastery of technology and the capacity to put ideas
into practice.
Page (94):
1. Get the fundamental right:

Public policy help HPAEs to accumulate human and physical +

allocation them better: accumulation, efficient allocation, and rapid
tech catch-up.
o Macroeconomic stability + export growth:
Low inflation (9% compared to the rest of low + middle
income, small fiscal deficits => rise long-term planning
and investment => exceptional Saving rates =>
remarkable recoveries of private investment.
Fiscal disciplines + high public saving.
Creating infrastructure + investment-friendly environment
+ tax policies to kept relative price => attract private
o Banking policy => increase integrity + be accessible to
nontraditional savers => rise level financial savings.
o Expansion of Accumulation of physical + human capital: initial
low inequality of income + public spending focus on primary +
secondary, tertiary (science + tech education),
o Agricultural policy: productivity + not tax rural eco.
o Openness to foreign technology + FDI

2. Selective Intervention:
o Promoting xport (highly selective interventions): shift from
strong bias against xport => pro-export incentive structure but
protect highly domestic market.
o Mild financial repression.
o Xport push trade policies:
HK, Malay, Sing: free trade + Japan, Korea, Taiwan: mixed
regimes => free for xport industries.
Xchange rate liberalized + currency devalued
Rapid accumulation (human + physical capital):
o Developing human capital:
Initial low inequality of income + public spending focus on
primary => stimulate expansion.
Secondary, tertiary (science + tech education),
Female literacy: more workers, lower fertility rates.
o Creating effective and secure financial systems:
Banking policy => increase integrity + be accessible to
nontraditional savers => rise level financial savings.
Business-friendly environment: from tax policies favoring I
+ policies (avoid high tariff on imported capital goods) =>
keep capital goods price low.
Creating infrastructure complementary to private I.

Efficient allocation of capital:

o Flexible labour market:
Less vulnerable + less responsive to organized labor
No minimum wage
Emphasis on job generation, boost effectively demand for
=> rise productivity + wage levels.
o Assisting market: credit for priority areas/
Technology catch-up + productivity:
o Actively seeking for foreign tech (openness to FDI => speeded
tech acquisition.
o Industries policy promote high tech sectors(Japan, Korea: import
protection + subsidy policy for capital + import inputs)
o Encourage export => change productivity (Pack, page 93)
Manufactured xport => tech upgrading (firms with export
greater chance to access modern tech through tech
spillover effect)
Chapter 2:
Agriculture sector is important:
1. Rich source of labour input: important sources of labor for urban sector
2. Main sources of investment and saving for capital formation: source of
invested saving + saving from incomes, build-up capital and capital
accumulation are require to start industries.
3. Foreign exchange: enables the acquisition of foreign technology.
4. Provide market for output of modern urban sector: depends on
distribution of earned income from industrialization.
5. Sources of food: developing countries rely on agri sector.
Agriculture growth + tech innovation => reduce poverty in China.
Leading sector for growth strategy in arg-based countries:
Agriculture transformation feature:
1. Arg share of output decline than share of employment: agriculture is a
sink of surplus labor. Population growth + industrialization
2. High labor productivity: average growth asia is 2.2% (80-I0)
3. High land productivity
4. Technology => improved yields
5. Composition of arg output shift to high value products: expand demand
for livestock products + high value crops => labor intensive.

4 phrases agricultural transformation:

1. Beginning: agriculture productivity/per rises.
2. Surplus: productivity rise => surplus of labor => develop in nonagricultural sector through tax, factor flows, government intervention.
3. Integration: non-argi sector grow ( resources flow out of agriculture,
rural factors and product market integrated better with those in the rest
of economy => sector into macro economy by improving infrastructure +
market eliquibrium linkages)
4. Industrialization: 3rd phases successful => economy industrialized, role
of argiculture is not # from others in industrialized sector.
Agriculture sector: important in launching the high growth in Asian economies.
Positive relationship between development strategy + rural economy => argi
development + alleviation of poverty.
Positive correlation farm size VS productivity. Farming intensity + improve land
quality, irrigation, modern tech => improve productivity.
Unequal land distribution/redistribution => farmers losing land => cycle
poverty => low productivity and investment.
Nowadays, agriculture output share decline faster ( growth in
Agriculture slow down) ( agriculture: largest employer in Asia but not the
largest sector gdp) because:
1. Low-income elasticity of Demand for agri products:
Engels effect: Income increases => consumers increase less their
consumption for food products than the change in income.
2. Sluggish process of agri products:
Engel effect => slowdown in Demand for arg products.
1. Green Revolution:
Irrigation: more extensive irritation allow farmers to regulate flow of
water, reduces flooding risk => able to plant multiple cropping and rise
Better crop varieties: higher yields => suited to irrigated land

Fertilizers/pesticides/herbicides: fertilizers were most profitable can be

used with varieties plant.
Farmer who have smaller plots + lower income to adapt fertilizer
application => not exp full effect of its.
Diminishing return to large-scale irrigation
2. Labor productivity.
Rapid rural-urban migration => reduce population pressure on rural.
Rise demand for agri products + standards of living in city.

Currency exchange rate affect technology, labour intensive production

technology => agriculture ( undervalue of currency => product cheaper
=> promote export, discourages imports).

Sustainable agriculture: food production that integrates the goals of env

health, eco profit, social and economic equity.
Satisfy human needs for food and fibre, enhance envi quality, non
renewable resources and on farms resources efficiency, integrates natural
biology cycle an controls, sustains economic viability,, improve quality of
life for farmers and society.
Threat to sustainable agriculture:
1. Land degradation: 74% land in South and SEA : erosion, wind, chemical
a. Cause by over intensive-cultivation. Meet demand of basic foods,
smallholder and rural grow crop by pushing into ecologically fragile
areas intensively => vulnerable to erosion. 75% china area is land
b. Over intensive livestock keeping =>
c. Cause by over use of mineral fertilizers. Lao, Vn, => use mineral
fertilizer => destroy structure and nutrient balance of soil.
2. Deforestation:
a. Lao, VN, Russia had high deforestation 00-05 cause by high fossil
price => cut off trees and rapacious timber industry.
b. Mangrove ecosystems affect by shrimp cultivation => degrade
water supply, reduce biodiversity,.
3. Water:

a. Over extraction: intrusion of saline water (40% in Asia is

b. Contamination (fer + pes + animal wastes)
c. Urbanization: rise pp => rise waste water.
d. Biofuel for land: as Food security threaten by water withdrawal for
factories: withdraw larger share of water than farmers.
4. Biofuel rise => demand for bio fuel use for motor rise.
a. Increase GHG emission: switch from tradition to biofuel crop => use
fert, chemical,
b. Crop from biofuel feedstocks => displace for food => rise prices.
i. In 07-08: large biofuel production => surge food in US BRA
ii. China: CORN:
5. GMC:
a. Benefits: higher yields, tolerance of herbicides, stronger resistance
insects => reduces input cost.
b. Disad: massive in tech + les glamorous area (organic agri) =>
affect the food security of the poor)
6. Climate change:
a. Higher co2 in air => photosynthesis => boost yield.
b. Melting of Himalaya => feed river rise (Mekong, Indus, Salween)
c. Temperature changes => time of growing seasons change =>
affect farmers.
i. Change in Rainfall=> affect water supply.
ii. Flood, drought, storm.
Sea level rise:
o Salwater intrusion: high salt level in soil => draw water out of
germinate seeds and roots -> Desiccation
Destroy rice production: few low yields survive
o Toxic from salt constituents, chloride from salts => toxic to
Natri in soil structure make soil dense and compacted
(soybean, vega crop is sensitive => can not tolerate much
salitiny, corn can but cant grow next year.
o Temperature rise: affect pollination period (corn, wheat, rice).
Dehydrate plants:
Co2 rise: greater water use and high rate of
photosynsthetic => good but reduce evapotranspiration
=> costly pest and weed infestion.
Drought: increase pressure on water supplies, affect rice
production => massive crop failure, water shortages,
forest fires.
Phi: increase climate change => can not depend on
rainfall => oump water onto fields => financial

Reduce moister
Wildfire: heat wave =>
o Flood: inundations of land surface.
Vietnam: change in climate => annual flood Mekong river
delta occurs more often => causing low yield and low crop
=> loss of food stocks + crops in the fields. To the poor, it
represent for a large proportion loss of their assets.
Flood in Chao Phraya Rier basin 4 months of ravaging cost
72mil bath => take away opp of farmers to benefit from
farming rice rise.
Element of food security:
Food availability: sufficient Q of food through import and domestic + food
Food access: access by individuals to adequate resoirces. Acquiring
appropriate foods for nutritious diet.
Utilization: through adequate diet, clean water, sanitation, healthcare =>
reach nutrition demand.
Stability: can access food anytime. Economic and climatic crises,
agricultural season => need Stability.
Problem of Food Security:
1. Food prices rice (rice, wheat, corn are main food energy of poors diet) =>
limit poor production progress + rise inequality.
2. Affect Economic downturn => affect the poors income => loss
employment + affordability to staple foods => rise recognition about
agricultures vulnerability to climate change ( drought, floods,) => longrun efforts to ensure food security for national + household levels.
3. Food price increase:
a. Demand > Supply, stock depleted=> higher price level early 2ks.
b. High volatility of food prices in 2k9 and II-I2.
Cause of food price change:

Supply side: severe water shortage affect soil erosion, water scarcity,
urban encroachment => agricultural land base.
o Climate change (drought, aridity increasing in South + central Asia.
o Land + crop => biofuels use in US, EU.
o Productivity affect by crop diseases, climate change.
o High price of petroleum => higher input prices => high cost.
Demand side:

o Income + urbanization change => change in dietary => Asian

consume more wheat products => decline consumption of rice.
o High petroleum prices + policies => rise demand of cone,
sugarcane, oilseeds.
US ex rate (depreciation)=> exacerbated price change + dampened
domestic price increase in countries appreciated currency comparing to $.
Higher volatility of food prices is caused by:
o Vagary policy, global food stock declining, weather-related =>
volatility of food prices.
o Ill-advised policy responses: export restrictions + aggressive import
=> destabilized world market.
o Inelastic S+D + lower food stocks + weather => volatility.
Substitution in D (rice + wheat as food, wheat + corn as feed)
=> improve some of volatility.
o Speculative investment in agri commodity markets (wheat, corn, )
=> volatility
RICE: policy + market psychology => price spike.
WHEAT: weather (drought)+ stock ( yield variability) => Led international
prices rise from 5 to 9 in 2007.
CORN: biofuel application => diversion of corn rise rocket cause of
mandate imposed by US => volatility when supply is tight.
Strong rls between stock to use ratios and prices => lower stocks =>
market uncertainty when there are supply + policy shocks => volatility

IMPACT: food price contribute inflation => affect eco growth.

Household and country impacts:

Transmission of world price to domestic market (highest mainly in small

pp countries): trade openness, domestic price controls, quality of
infrastructure (transport, distribution costs). Transmission of rice + wheat
low in Asia where large domestic food stock buffered local markets.
Household level:
o Income higher, budget share of food declines.
o Higher incomes + urbanization => more diversified diet => decline
consumption of cereals.
o SEA: income elasticity of D for rice negative cause of Asian diet
changing. Government protect poor by tariff reductions,
Rural: generate employment + income => rise productivity.
o Higher food prices => shift to cheaper foods.
Farm level: Higher prices => raise Supply.

o People become poor due to increasing of food prices, even food-in

secure situation.
o Higher prices => raise farm incomes of net seller, negative on small

Exporting countries: restrict trade (minimum xport prices, quota, variable

xport taxes, outright xport bans)
o Export restrictions keep domestic price lower + politically symbolic
Importing countries: reduce tariff + tax on food imports.
o Absence import subsidie:
o Price transmission high, domestic prices fall + world price declined
+ good aid + Gov to G shipment arrived: Phi buy large inter
purchase of rice for domestic supplies => contribute to world price
spike + penalty rice hoarding.
o Phi, Thai, Viet: support producers to limit rising input cost ( fertilizer
rise +=> live stock producer rice).

1. Refresh agricultural productivity growth in order to feed Asias ever more
urban and
Prosperous population, a challenge that is enlarged by the simultaneous need to
adapt to climate changes and, ideally, creates a more carbon-neutral
2. Ensuring that small, resource-poor farmers have the opportunity to
compete and thrive in modern food value chains; and
3. Tackling Asias persistent malnutrition in a sustainable, financially efficient

Climate change : intensified-rainfall, extreme weather measurable

impacts on agriculture: economies, crop, farming systerms, natural
resources (rising incomes, water scarcity, degradation of forest
o The increasing of CO2 from fertilizer benefit for photosynthesis.
Fate of small farmers in modern value chains:
o Small farms important (only 40% total farm area but produce large
share of staple crops + play central role in sustain agriculture and
reduce GHG emissions + economically viable with right tech and

Factory Asia: model of regional production networks connecting factories in #
Asian economies, produce parts and components that are then assembled, with
final product shipped largely to advanced economies.
The rise of Asian manufacturing: evident in the increased shared of valueadded in global manufacturing.
Weak economic prospects + labor factor cost rising => erode price
Asia focus mainly on global tech/innovators + labor intensive tradable.
Korea: from large trade surplus of labor intensive tradable => deficit
cause higher wage make it Labor Intensive Tradable competitive =>more tech
advanced product => trade surplus in global innovation for locals in automobile
manufacturing => sustain.
Factory Asias rise in Japanese manufacturing: in 2k, trade surplus in
global technologies + innovation. Electronics migrates a lot => trade surplus
drop => machinery + automobile manufacturing becomes larger surplus for
Global innovation for locals.
Todaro + smith (20II): structural change theory focus on mechanism by
which underdeveloped economies transform their economic structure from
heavy emphasis on traditional subsistence agri => modern and urbanized
industrially diverse manufacturing and service economy.
Factory Asia will be dominant driver of growth if its adapts to trends and
transforms itself.
Changing global economic landscape + evolving consumer taste =>
affect D for factory Asias product.
1. economic prospects after global financial crisis:
a. slow recovery + weak after financial crisis, high fiscal/deficits.
b. Aging population => lower demand on manufacturing, higher in
medical + health serv.
c. Falling trade barriers (cheaper transportation cost, capital mobility
improvement, efficient communication)
=> advanced economies shift to emerging economies.
Policy Recommendation: support domestic Demand, forge effective
regional + south-south cooperation, multilateral zingfree trade, smart
incentives for targeting regional markets.
2. Asias Expanding middle class => Factory Asia must cater their demand:

a. Demand from middle class: population reach middle class status,

two fold as in the past 90 vs 09 => car ownership in China + India
sharply increased.
Policy Recommendation: ensure Investment is adequate, as
consumption D rise. Support inclusive + environmentally sustain
3. Quality and branding: for sustain growth, long-term reputation for quality
and innovation depends on brand identities => must built stronger
Policy Recommendation: public-private dialogue to boost product
Make sure labor + safety standards comply with international norms
+ invest in standards lab for quality testing + assurance.
4. Protectionism: weak economic growth + unemployment =>
Policy Recommendation: ASEAN + global group like G20 keep
protectionist tendencies.
1. Rising complexity in Managing supply chains:
Long + complex supply chain be more vulnerable to natural disaster
+ reputational risks
Policy Rec: public sector adopt policy that attract and promote
regional FID.
2. Wage rise => Narrowing wage differentials:
a. Cheap labor => manufacturing growth.
i. Income rise, wage surge 86% in Asia (2kI2) => wage gap is
closing => Asia lost comparative advantage => companies
has to relocate manufacturing.
b. LDC difficult to join supply chains due to the closing wage
differentials => technological advanced can position Asia in
internationalizing production + job creation.
Policy Rec: adopt accommodative policies to support private sector
effort => move up value chain
3. Managing xchange rate fluctuations:
a. Safe haven status => Yen gained against $ => hurt Japan Manu
competitiveness => have to use monetary policy to change it.
b. Dong depreciation => difficult to manage manufacturing operations
across several exchange rate regimes.
Policy REC: develop financial markets + products to help private
sector manage risk.
4. Shortage of skilled workers:
a. Wage rise + skill shortages => hurt Asia. Upgrading skills, work be
more skill-intensive (scientist, engineers, skilled technicians
Important developing manufacturing countries).

Policy REC: adopt public sector measures => support skills

management by education, enable private sector => reskill workers.
5. Demographics:
a. Japan and Asian tigers has low birth rate => Population is shrink =>
limit S of rural area labor => pressures on wage => need to
maintain young + growing pp.
Policy REC: countries in Asia cooperate + facilitate private sector =>
align skills to boost competitiveness.
6. Taking domestic strengths abroad, production shift from high cost to lower
cost countries:
a. Bottle neck in infrastructure like VN + Bang (=> limit manufacturing
type can be transferred, level of product sophistication) + minimum
wage rise => hurt competitiveness of industries => shift from high
cost to lower cost countries.
Policy REC: support small medium enterprises into production
Launch public-private to facilitate private sector positioning of
investment in lower cost locations in region.
New technology are changing nature of manufacturing:
1. SOFTWARE become more important => comprise more share of value:
a. Hardware replacements + product upgrade cycles =>margins for
hardware manufacturers will be squeezed cause consumer are
satisfied and simply update.
b. Pp rich => need design + customized products. (iphone 200 for
hard, 400 for design),
Policy REC: support skills upgrading to facilitate value chain + product
2. New technologies: robotics + additive manufacturing: new era in
a. Asia (Japan); largest market of robotics, rising wage, demographics
change => rise factory automation in Asia.
b. Additive manufacturing (3D printing): allow customers customized
production at low cost => no need for machine tools or assembly
lines from different components.
Policy REC: invest directly in R&D + absorb new technology.
1. Traditional, overpopulated rural subsistence sector with zero marginal
labor productivity (surplus labor).
2. High productivity modern rural industrial sector, which labor from
subsistence sector, is gradually transferred.
HPAEs and Structure change: Chowdhury +Islam (93)
Share of manufacturing change in GDP:

o Share of manufacturing value added in GDP (korea, Sing, Taiwan)

larger than average share of developing countriess MVA.
o Production structure is same to developed economies (except
Hongkong declined, due to the relatively industrialized + important
before 60s).
Share of manufacturing employment: sustainable structural change in
East Asia.
o Increase in Korea, Taiwan, Sing.
Close rls between the average growth rate of MVA and structural change
in manufacturing sectors.


1. Technology:
a. Countries has limited capital and laboy in early => countries
gradually move to capital intensive => move higher value added

Sustainable development suggests that the crux of the matter is how to
describe value so that it does not underestimate futures interests and utilities;
future is given an equal treatment.
Green economics is
about provisioning for the needs of all people and nature as beneficiaries of
sustainable economic transactions, but not as throw away inputs.
Covers all aspects of sustainability: poverty, environmental degradation,
green accounting, green GDP, business ethics and governance, green
jobs, green generations, the underprivileged and special children, social
justice and equity, climate change, gender inequality and women
empowerment, mass consumption, biodiversity, and many more.
improved human well-being and social equity, while significantly reducing
environmental risks and ecological scarcities.



Adaptation projects such like dam construction, monitoring weather extremes, developing disaster
preparation strategies and communal capacities buildings


It has been known that in short term, growth was always being highly favour
compare to environment. Governments, factories, organization look for short
term, reality profit. Thus discussing environment problem is on scale of longterm.
Asia has troubles in these sections:
- Freswater resources: water is being polluted, especially in high
population city.
- Air quality: emerging air pollution and green houses gases problem.
Land and forests: Degradation and deforestation.
o Asia used to have lots of virgin forest
o Now only around 4 percent.

Chung and Quah (2010): raised 3 problems that threaten green growth in Asia:
- 1. The problem of sitting environmentally unfriendly facilities (NIMBY) and
NIAB syndrome
o Example: factories that burn rubbish, waste processor, nuclear
o In short, facilities that people do not want them in their backyard.

2. The problem of accumulating waste garbage disposal.

o Asia has the habit of dumping waste, garbage in empty land instead
of proccessing.

3. The problem of neglecting environmental intangibles in decision

o If we dont put a price on certain things, people overlook it and treat
it as valueless.
o Thus, many things environment related might be ignored because
people did not put a price on it.

Role of environment

1. Life support mechanism

o We cannot live without suitable environment.
2. Essential inputs for production activities.
3. Waste Receptacle
o The environment has a way to recycling the waste, renewing itself.
o Example: Water, air circulation etc
o Environment has carrying capacity.
4. Source of aesthetic beauty.

Failure of the market for environmental goods.

Consult text book for deeper analysis.
The market for environmental goods fails because:
- Many natural resources are open access:
o We cant just simply stop people from using it.
o Considered common property, have no well-defined owners
- Improperly designed or inadequate property rights:
o Effective property rights must have 4 characteristic:
Exclusive: non-owners cannot use the resources.
Transferable: Can be exchanged, transfer ownership.


The ideas of effective property rights are ideal, far from reality. The limitation for
environmental goods can be understood as this:
- Who owns the fish in open seas?
- Environmental goods like public goods, often indivisible, non exclusive,
even invisible.

Policies for sustainable development.

Here are some suggestion approaches:
- Command and control: Popular, but criticized. Increase abatement
costs, high monitoring cost.

Economic incentives
o For example: permit to release waste
o Carbon credit you can sell your carbon credit if you release under
allow limitation.
Tenure reform

Phase out subsidies

o Give out subsidies to those that successfully reduce environmental

Improve institutional capacity.

o Improve government capacity to handle environmental issues.

3 key sets of policies that contribute towards sustainable

Chung and Quah (2010)
- 1. Reforming distortionary subsidies
o Carefully monitor and cut down inefficient subsidies to
environmental policies.
- 2. Greening tax systems
- 3. Creating market for pollution control and efficient natural resource
o However, in Asia, this might be difficult due to bureaucracy and