I worked on an assignment for my class Growth and Development Economics today which discusses the link between institutional development and economic growth in the context of South Africa. One of the core readings is the NBER working paper Institutions as the Fundamental Cause of Long-Run Growth by Acemoglu, Johnson and Robinson (2004). I scribbled down some little diagrams to grasp their argument about the link between the distribution of resources, political institutions and economic prosperity when I realised that the same chain of arguments could potentially be adapted to reason why we need well-defined property rights over natural resources and the establishment of an “environmental market” (I can’t think of a good word just now).
Acemoglu, Johnson and Robinson argue in their paper that there are two main state variables governing the system, i.e. determining long-run growth. The first variable is ‘political institutions’ which determine the distribution of de jure (institutional) political power. The second one is the ‘distribution of resources’ which determines de facto political power. There is also a variable considering the possibility for collective action if groups in society can coordinate to act as collective. However it is considerably weakened by the free-rider problem which makes it hard for groups to mobilize the public in their interest. In sum, these two variables are sufficient for calculating all other variables in the system, also economic performance as the bottom line. They see it as a “natural hierarchy of institutions” (p.5) with political institutions at the top which influence equilibrium economic institutions in the middle which in turn influence economic outcomes as the bottom line – both through direct and indirect channels (if I get it right here). A fundamental part of their theory is endogeneity, which makes the model a relatively complex social system, and the view that society is the backbone. Society both consciously chooses its economic institutions as well as the distribution of political power.
The theory can prove that political and economic institutions shape people’s incentives and enforce rules and regulation in society. It proves that property rights and the presence of efficient markets are a fundamental prerequisite for long-run economic growth. Therefore the question for my thought experiment today is: Can this insight help us improve our current state of environment protection, i.e. internalize the costs imposed by negative externalities like pollution, environmental degradation or traffic jams? Can it help us develop a framework for green, sustainable growth in the long-run?
I think about it in a similar manner as the argument about political institutions; so start by replacing environmental for political institutions. Then there is a new system, let’s call it ‘Market Environmentalism’ at the top of the natural hierarchy. In the top system society determines the choices through de facto and de jure (institutional) environmental power. If it can coordinate to act as a collective, e.g. demonstrations, environmentalist groups, petitions, it can create demand for strong environmental institutions. On the other hand, there is the aspect of how resources (wealth) are distributed in that society. If they are held by a small share of the population and it can exert significant power or if companies have close ties with politics, then they can lobby them in favour of their individual interests or business. While collective action tends to establish the demand for the environmental institutions, lobbying probably tends to be the opposite. I called this first system in the diagram ‘Market Environmentalism’ because it reminded me of the second theme ‘environment as a property’ and ‘free market environmentalism’ in my blog post 2016 vs 1996 on 23 April.
In the top system the environmental institutions set the framework for the ‘green’ part of the economy. They establish the rules for the natural resource market/ environment and create property rights over environmental resources leading to an efficient ‘environmental market’. This is then transmitted into the equilibrium market economy where it may influence society’s choice over economic institutions shifting the dynamic equilibrium. Ultimately the bottom line is economic performance and environmental sustainability achieved together. Once this circle is set off it may be virtuous in nature stabilizing the upper systems in the natural hierarchy.
One might think about a conventional economy like lacking the upper part of the diagram due to lacking environmental institutions. A solution could be to
- enable collective action to establish sufficient demand for environmental institutions
- achieve a more equal distribution of resources to prevent the influence of individuals’ interests preventing the establishment of environmental institutions
- establish environmental institutions with the help of external actors in the international environment.
I know that the diagram is somewhat simplistic but it is a good start for critical thinking! Thanks for reading,
Acemoglu, D., Johnson, S. and Robinson, J. (2004). Institutions as the Fundamental Cause of Long-Run Growth. NBER Working Paper No. 10481. Retrieved from: http://www.nber.org/papers/w10481