01/14/23

Fuad Bullo (Msc DE)

CHAPTER SEVEN:
ENVIRONMENT AND DEVELOPMENT

1
INTRODUCTION

 The recent literature on political economy shows a broad area of

01/14/23
‘government failure’ in the efficient use of natural resources.
 The implications of such government failure could be as
damaging to the economy as those of ‘market failure’. Such

Fuad Bullo (Msc DE)

failures comprise:
1. Intervention in markets and present wrong price signals which
distort allocation (Agarwala 1983)
2. Marketing controls;

3. Land use controls

4. Inappropriate fiscal policies (e.g. taxes and subsidies)

5. The general failure of bureaucracies to formulate and implement

rational national resource policies in LDCs.
 Some of these failures will have a clear impact on natural
2
resource degradation (NRD) in LDCs.
CONT..

 The specific aims of this chapter are:

01/14/23
1. To examine some macro variables which could influence the
process of NRD like deforestation (since distortions can generate
NRD, there is a case to examine the impact of price distortions,

Fuad Bullo (Msc DE)

e.g. overvaluation of exchange rates and currency controls, on the
use of natural resources at the macro level)
2. To analyse some economic policies to prevent NRD in LDCs.
3. To describe the determinants of demand for and supply of
fuelwood in some African countries and suggest an alternative
farming system for protecting the environment in LDCs.

3
DEFORESTATION AND MACROECONOMIC
ENVIRONMENT

01/14/23
 At a macro level, it is possible to conceptualize the impact of a
number of variables to explain NRD in general and

Fuad Bullo (Msc DE)

deforestation in particular.
 Here, some major candidates are:

1. Population growth rate

2. Arable land availability per capita

3. An index of food sufficiency

4. Movements in terms of trade or real exchange rates

5. Fiscal policy, debt-export ratio or an index of debt service.

6. per capita income.

4
CONT..
 The area of closed broad-leaved forests industrially logged can be

01/14/23
used as an indicator of tropical forest degradation as it is highly
correlated with the available data on deforestation.
 In theory, there are reasons to argue that significant terms of trade

Fuad Bullo (Msc DE)

losses, severe foreign exchange constraints, tax/subsidies policies,
rises in debt-export or debt-income ratios and subsequent
exchange rate depreciation made deforestation ‘incentive
compatible’ in many LDCs.
 land shortage seriously constrains arable agriculture, continuous
devaluations are likely to make governments more inclined to
permit logging and colonization as a prelude to forest land
conversion to agriculture.
 Further, a rise in incentives for agricultural production invites
illegal cultivation of public forests under a condition of virtual
5
open access.
‘TRAGEDY OF THE COMMONS’
 In the absence of general economic policies to prevent the over-
use of physical and economic resources, it is very likely that
resource use will be inefficient.

01/14/23
 Such inefficiencies are quite common in LDCs with common
property resources or open access resources and the effect on the

Fuad Bullo (Msc DE)

environment could be very damaging.
 The final result could be tragic when a common property, say in
parts of Africa or Asia, is overgrazed.
 Picture a pasture open to all. Each herdsman tries to keep as many
cattle as possible on the commons.
 This works well for centuries because wars, poaching, and disease
keep the numbers well below the carrying capacity of the land.
 But eventually the day of reckoning arrives. Each herdsman seeks
to maximize his personal gain; 6
CONT..
 But this is the conclusion reached by each and every rational
herdsman sharing a common. Herds are increased without limit in
a world that is limited. Therein is the tragedy: Freedom in a

01/14/23
common brings ruin to all. (Hardin 1968)
 This brilliant statement of Hardin implies that in the absence of a

Fuad Bullo (Msc DE)

tariff or rent on scarce resources, serious misallocation in their
uses could result.
 In some cases, common property resources will not just be used
but abused because of overgrazing and destruction of soil fertility.
 The same tragedy occurs when everyone ‘fishes and overfishes’
and each firm/farmer pollutes and over-pollutes the air or water to
maximize profit in a competitive economy.

7
CONT..
 One simple question arises. Why are scarce resources so under-
priced in LDCs? The main reasons could be as follows:
For common property/open access resources, since everyone’s

01/14/23
1.
property belongs to no one, no owner is interested in preventing
air/ water pollution to keep the private cost of clearing the

Fuad Bullo (Msc DE)

environment down to the minimum. Sometimes, we observe the
same phenomenon in highly congested motorways as the price of
using such highways is zero.
2. The cost of monitoring the use of common property resources is
high; so are the costs of collecting tariffs. Hence, governments
sometimes decide to stay away from the duty of protecting the
environment.

8
CONT..
 However, rising concern for environmental problems has forced
economists, scientists and politicians to discuss practical policies
for preserving the environment in the last two decades.

01/14/23
 The general economic solution to achieve ‘efficiency’ in the
Paretian sense could be achieved only in an ideal world of a fully

Fuad Bullo (Msc DE)

competitive market economy.
 Problems arise because many LDCs suffer from ‘distortions’ as
they experience both market and policy failures.
 Policy failures, i.e. government failures, occurred in the context of
(i) trade regimes, (ii) population growth, (iii) fiscal policies (i.e.
taxes and subsidies), (iv) the definition and enforcement of
property rights, (v) inadequate environmental information and (vi)
misuse of government expenditure.
9
01/14/23 Fuad Bullo (Msc DE)
10
THANK YOU AND GOOD LUCK