Envirodevonomics: a Research Agenda for an Emerging Field†
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Journal of Economic Literature 2015, 53(1), 5–42 http://dx.doi.org/10.1257/jel.53.1.5 Envirodevonomics: A Research Agenda for an Emerging Field† Michael Greenstone and B. Kelsey Jack* Environmental quality in many developing countries is poor and generates substantial health and productivity costs. However, the few existing measures of marginal willingness to pay (MWTP) for environmental quality improvements indicate low valuations by affected households. This paper argues that this seeming paradox is the central puzzle at the intersection of environmental and development economics: Given poor environmental quality and high health burdens in developing countries, why is MWTP seemingly so low? We develop a conceptual framework for understanding this puzzle and propose four potential explanations for why environmental quality is so poor: (1) due to low income levels, individuals value increases in income more than marginal improvements in environmental quality; (2) the marginal costs of environmental quality improvements are high; (3) political economy factors undermine efficient policymaking; and (4) market failures such as weak property rights and missing capital markets distort MWTP for environmental quality. We review the literature on each explanation and discuss how the framework applies to climate change, which is perhaps the most important issue at the intersection of environment and development economics. The paper concludes with a list of promising and unanswered research questions for the emerging sub-field of “envirodevonomics.” ( JEL I15, O10, O44, Q50) 1. Introduction data. Figure 1 shows air and water quality in developed and developing countries. The ost visitors to developing country cities top panel shows airborne particulate mat- Mnotice the poor environmental qual- ter ( PM 10 ) concentrations in urban centers, ity: their eyes sting, the water makes them while the bottom panel shows dissolved sick, the views are obscured by smog. These oxygen, a measure of good water quality.1 casual observations are backed up by the 1 Particulate matter comes both from primary sources *Greenstone: University of Chicago and NBER. Jack: (incomplete combustion, dust) and secondary reactions in Tufts University and NBER. We are grateful to Eric Lewis, the atmosphere. Particles smaller than ten micrometers Jonathan Petkun, and Pascual Restrepo for excellent in diameter are typically associated with the greatest risk research assistance and to the editors and four anonymous to human health. Dissolved oxygen is a proxy for organic referees for comments and suggestions. waste, which uses oxygen in decomposition, in the water. † Go to http://dx.doi.org/10.1257/jel.53.1.5 to visit the Sources of organic waste include sewage and urban runoff article page and view author disclosure statement(s). (US EPA). 5 6 Journal of Economic Literature, Vol. LIII (March 2015) Panel A. Air pollution Particulate matter (pm10) 198 200 Developed 150 Developing 121 100 42.56 50 38.17 32.5 23 24.014 17.8333 0 India Japan Russia Brazil China Germany Indonesia United States Panel B. Water pollution Dissolved oxygen 10.45 10.18 Developed 10 9.69 9.26 Developing 7.99 8 7.27 6.38 6 4 3.31 2 0 India Japan Russia China Brazil Indonesia Germany United States Figure 1. Environmental Quality in Developed and Developing Countries 3 Notes: Panel A shows average particulate matter ( PM 10 ) from urban centers, in μg / m , using data from the World Health Organization (2011). Panel B shows dissolved oxygen, in mls/litre, using data from the United Nations Environment Program (2001). The four most populous developed and developing countries are shown, ranked according to the pollution measure (from least to most polluted). Greenstone and Jack: Envirodevonomics: A Research Agenda for an Emerging Field 7 The developing countries are remarkably preference data, really 10,000 times lower dirtier (higher particulates, lower dissolved than typical figures for the value of a statis- oxygen).2 tical life in the United States? Is the current These stark differences in environmen- level of environmental quality in developing tal quality appear to have paradoxical con- countries optimal, leaving no room for policy sequences. On the one hand, the available improvements (i.e., is poor environmental evidence suggests that they lead to large quality just another dimension of poverty)? health and productivity losses. For exam- Is it possible that the welfare loss from poor ple, figure 2 shows the striking differences environmental quality in developed coun- in the burden of disease from air and water tries is greater than in developing countries pollution in developed and developing coun- in spite of the substantially cleaner condi- tries, as calculated by the World Health tions in the former? Organization.3 On the other hand, in spite of This paper argues that a series of critical this large disease burden, the small handful economic and policy questions about envi- of studies measuring marginal willingness ronmental quality in developing countries to pay (MWTP) for environmental quality cannot be properly analyzed or understood improvements indicate low valuations by with the tools of environmental economics affected households. For example, using alone or the tools of development economics households’ willingness to pay for access to alone. We believe that research is increas- clean water in Kenya to impute the value of ingly producing credible answers to these a statistical life (VSL) leads to an estimate of questions and a new field is emerging that USD2013 860 (Kremer et al. 2011), while is at the intersection of these two larger and typical VSL numbers from the United States more well-established fields.5 At the risk of are on the order of USD2013 8.6 million excessive reductionism, we argue that this (U.S. EPA 2010).4 field can be organized around a central ques- These seemingly contradictory facts raise tion: Why is environmental quality so poor in a series of compelling questions and puzzles. developing countries? Given poor environmental quality and high This paper develops four potential expla- health burdens in developing countries, why nations for the poor state of environmental is MWTP for environmental quality seem- quality in developing countries that apply in ingly so low? Put another way, is the value of varying degrees across contexts. These four a life in Kenya, as suggested by the revealed explanations go beyond the traditional mar- ket failures associated with the public goods and externality characteristics of environ- 2 We follow the UN categorization of developed and mental quality and are likely to be especially developing countries (UN Statistics Division), though the binary country-level classification overlooks large varia- important in developing countries. First and tions both within category and within country. most obviously, environmental quality may be 3 Obtaining causal estimates of the health consequences low because MWTP for environmental qual- of environmental quality is challenging. Randomized con- trol trials are unethical in many settings, and quasi-experi- ity is low. There are several possible causes ments face limitations when it comes to long-run impacts. of seemingly low MWTP for environmental In this paper, beginning in section 3, we emphasize the findings from experimental and quasi-experimental studies that we believe provide the most reliable causal estimates 5 In many respects, this research is an answer to of the health impacts of pollution in developing countries. Horowitz’s call for increased credibility in empirical 4 As the conceptual framework makes explicit, MWTP research at the intersection of development and environ- for environmental quality includes not only the valuation of mental economics in his review of the Dasgupta and Mäler morbidity and mortality benefits of improved environmen- (1997) edited volume The Environment and Emerging tal quality, but also aesthetic and income benefits. Development Issues (Horowitz 1998). 8 Journal of Economic Literature, Vol. LIII (March 2015) Panel A. Disease Burden from Air Pollution Deaths in 2004 from air quality, per 100,000 children under ve years of age 4 3.39 Developed 3 Developing 2 1.91 1.33 1.14 1 0.01 0.02 0.04 0.08 0 India Japan Russia Brazil China Germany Indonesia United States Panel B. Disease Burden from Water Pollution Deaths in 2004 from water quality, per 100,000 children under ve years of age 315.61 300 Developed Developing 200 129.91 123.24 100 55.47 0.09 0.18 0.33 4.68 0 Japan Russia China Brazil India Germany Indonesia United States Figure 2. Burden of Diseases in Developed and Developing Countries Notes: Panel A shows the burden of disease in deaths among children under five per 100,000 from outdoor air pollution. Panel B shows the burden of disease in deaths among children under five per 100,000 from poor water quality, sanitation, and hygiene. Data are from the World Health Organization (2004) for the four most populous developed and developing countries. Greenstone and Jack: Envirodevonomics: A Research Agenda for an Emerging Field 9 quality, including—most centrally—high explanations for the poor environmental marginal utility of consumption at low income quality in developing countries described in levels. In other words, under a very tight the previous paragraph. While there is an budget constraint, individuals may prefer to extensive literature that dates back several spend what money they have on consump- decades that provides a crucial foundation tion than on investments in environmental for this field,7 space constraints mean that quality. Second, high marginal costs of envi- we are only able to focus our attention on ronmental quality improvements would also a relatively small set of papers that priori- result in a lack of regulation to address issues tize causal inference and or open new areas / like pollution or deforestation. Marginal costs of inquiry (and even with this constrained are likely to be higher where policy design, set our coverage is necessarily incomplete).