The Hindu Business Line : Why pollution is not always bad

A CLOSER look at data indicating pollution levels around the world reveals some interesting facts. People living in developed countries on an average consume more fossil fuel pollutants than their counterparts in the developing world. For instance, the per capita consumption of carbon-dioxide (CO{-2}) in the US, Canada, Japan and the UK is more than in India. Measured in tonnes per capita, CO{-2} emission in these four nations is 19.9, 16.1, 9.3 and 9.6 respectively compared to India's 1.1 (World Development Indicators Database, 2002). It is to be noted, CO{-2} is an important by-product of fossil fuel consumption and is associated with global warming.

Developed nations, in general, produce more fossil fuel pollutants because of their higher energy consumption. Per capita energy use (in kg oil equivalent) in the case of the four above mentioned developed nations are 8158.7, 7928.9, 4069.9 and 3870.9 respectively compared to India's 481.6. So, is pollution always bad for society? If that is the case, then one would expect a higher standard of living in India relative to these developed nations. Unfortunately, the reality is otherwise. The per capita gross national income (in dollar terms) in the US, Canada, Japan, and the UK, are 34,100.0, 21,130.0, 35,620.0 and 24,430.0 respectively while India's is 450. So, pollution may not always be bad.

One has to look at the cost pollution imposes on society and the benefits that society gets by curbing activities causing pollution. If a steel plant emits CO{-2}{-,} the cost includes the health hazards associated with carbon-dioxide emission, whereas benefits include the employments, profits and incomes that the plant generates. If the gains outweigh the cost, then pollution is actually good for society.

There is a way to handle pollution. Going back to the steel industry example, one can think of solutions. First, telling the factory to reduce pollution.

Second, installing air-purifying systems for the residents living in the neighbourhood. And, third, relocating all those living in the neighbourhood and use the land only for industrial production purpose.

Most environmentalists will go for the first option. But would it be the optimum solution?

The steel manufacturer can attain a lower pollution level by curtailing production. But society would be the loser, if the value of steel lost (because of reduced production) exceeds the cost of air-purifying systems. In that case, the steel manufacturer can always install air-purifying systems and still not reduce its production. Ditto, for the third option. If the cost of relocation is less than the loss from reduced steel production, efficiency lies in rehabilitating those living in the neighbourhood instead of closing the factory. This idea was first propounded by Ronald Coase and is known as Coase Theorem in economics.

However, Coase Theorem has some limitations. And that has to do with transaction costs and free rider problem. If any one in the neighbourhood wants compensation from the steel industry, he has to negotiate with the steel industry. The negotiation will cost him both time and money — the transaction cost. If he succeeds in making the steel industry produce less, not only he but all his neighbours gain too. So no one in the neighbourhood wants to be the negotiator. This is free rider problem.

Here comes the importance of government. It has the best information on how to handle pollution. In developed nations, though they consume more fossil fuel, the cities enjoy a much cleaner environment than, say, we in India. As in the US, all factories are located on the outskirts of the cities. American consumers are willing to pay a higher price (in the form of tax) for having clean cities. Hence, the US government has no problems implementing a strict environmental policy.

Unfortunately, the problem is different for India. Indians are more worried about poverty, illiteracy and a way to efficiently allocate resources for the best possible use. Some 44 per cent of our population lives below the international poverty line: 31.6 per cent of the adult males and 54.6 per cent of the adult females are illiterates (World Development Indicators Database, 2002). And the resources are not efficiently distributed.

India is ranked 66th among 85 nations in its corruption perceptions index. Turned the other way round, India is the 14th most corrupt nation (Transparency International Figures). India's corruption index was 2.7 on a scale of 0 (highly corrupt) to 10 (very clean). The rating is based on perceptions of business people, academics and risk analysts. This speaks about our inefficient allocation of resources.

Inefficient resource allocations not only affect productivity but also tar the country's reputation affecting foreign direct investments (FDI). Productivity is an important determinant of growth in the long run, whereas FDI is crucial in the short run. Before policy-makers start tinkering with the pollution factor, it is better that they address these issues first. It is relevantly easier for the developed nations to cry passionately for a cleaner world. They do not face the rudimentary problems of economic development that countries like India face.

At the just concluded Earth Summit in Johannesburg there was talk about resource transfer from developed to developing and less developed nations.

The idea is to help the latter group with resources; to enable it to produce goods in a more environmental friendly manner. Such technology and resource transfer are certainly welcome for the world as a whole.

However, nobody knows when this is going to happen. The modality of resource transfer and the consequence of any party failing to enforce environmental friendly laws (after taking resources) are debated over.

True, there is a trade-off. And the economy needs to decide which path to take. In the current situation, it is more important for us to invest in both human and physical capital, eradicate poverty, and concentrate on overall development based on the efficiency criteria.

Time has not yet come for us to start talking on pollution without taking care about these other important problems.

(The author is an independent economic analyst. All comments to nilbanik@cc.usu.edu)

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