The Political Economy of Sustainable Development

Valuation, Distribution, Governance

Dirk Jacob Wolfson

• Publisher: Palgrave Pivot
• Year: 2015
• ISBN:
  9781137552754
• Topic: Politique et relations internationales
• Subtopic: Échanges et tarifs douaniers

The author shows how sustainable development may be organized, valued and distributed by introducing situational contracting as an interactive and contextual mode of governance. Situational contracting provides a road map for where we want to go, serving the prevailing ideology in implementing the trade between efficiency and fairness.

1

Introduction

Abstract: This book is written to make the core of the political economy of sustainability accessible to students and practitioners, in the belief that recent developments in interactive governance and behavioural economics can be helpful in dealing with the design, valuation and distributional concerns of environmental policy. This first chapter explores the state of the art in environmental policy analysis. In a democracy, politicians want to be advised on outcomes, on cost-effectiveness and distributional consequences, on where the dust settles after a specific intervention. It closes with a brief introduction in global economic development and ecological constraints.

Wolfson, Dirk Jacob. The Political Economy of Sustainable Development: Valuation, Distribution, Governance. Basingstoke: Palgrave Macmillan, 2015. DOI: 10.1057/9781137552754.0005.

1.1About this book

Sustainable development is a grand ideal that the Brundtland Committee (WCED 1987) defines as a redirection of social development that meets the needs of the current generation, without compromising the needs of future generations. Intellectually, designing for sustainability requires an interdisciplinary effort to combine results from ‘hard’, refutable ecological science exploring the biophysical aspects of environmental policy with an analysis of its social efficiency to maximize net worth in the world economy as a whole and normative visions on the valuation and distribution of policy impacts. In terms of politics, the issues at hand range all the way from greening local surroundings to dealing with global warming, sea-level change and desertification in ambitious transitions in which social structures, institutions, cultural attitudes and practices are broken down and new ones are established (Loorbach 2007: 17).

In approaching these challenges, this book does not offer a grand design of a sustainable world, but concentrates primarily on the smaller steps that will get us closer to sustainability, eventually, as long as we develop sensible projects and policies. To that effect, it undertakes a multi-goal policy analysis (Boardman et al. 2006: 43–45), exploring not just the efficiency and effectiveness of interventions in the environment, but their valuation and distributional consequences as well, and conceptualizes the legitimacy of public action in terms of its institutionalized acceptability. It takes the biophysical findings of ecological science as given, but shows how strands of economic theory, political economy, psychology, political philosophy and public administration may be interwoven to make environmental policy more effective and acceptable. The book is written in an effort to make the core of economic reasoning more accessible to experts in other disciplines, in the belief that its method and, particularly, recent developments in behavioural economics and political economy can be helpful in dealing with the design, evaluation and distributional aspects of environmental policy.

In terms of method, it is held that economic theory as such – as a descriptive and refutable science – cannot pass judgements on the ethical issues involved in safeguarding sustainability. Chapter 3, however, goes into the leading visions of justice in political philosophy and Chapter 4 shows how a mechanism design of situational contracting in public administration can reveal how the governance of environmental challenges actually deals with the normative valuations and distributional consequences of safeguarding environmental sustainability. Mechanism designs belong to the normative realm of political economy and describe the ‘architecture’ of policymaking. They begin by identifying a desired outcome or social goal, and then develop a feasible mechanism to attain that goal by making the incentives of the relevant actors compatible (Maskin 2008: 567–568). Situational contracts clarify, customize and link rights and obligations. They integrate top-down political guidance on norms, best practices, rights and obligations interactively with bottom-up and horizontally generated information from citizens, political and administrative partners and agents in delivery on preferences, capabilities to transform resources into desired results and willingness to cooperate. The situational contract was originally developed to deal with information asymmetries in the implementation of social security, but is meanwhile gradually rolled out to deal with information problems in general (Wolfson 2012 and 2015).

Section 1.2 of this chapter briefly summarizes what non-economist need to know and economists should remember about the way in which economic theory analyses choices made between environmental and other desiderata, in an effort to contribute to an efficient use of scarce resources, such as time, money, or inputs in kind. Scarcity and efficiency are the core concepts of economic theory, or ‘economics’: in paradise, there is no need for economics or economists. In real life, however, scarcity calls for efficiency, but efficiency rivals with other is criteria of good governance such as fairness and sustainability. The section begins with the role that an ideal system of ‘perfect’ markets might play in the coordination of the use of scarce resources, but ends with an impression of the origins of market failure as a possible agenda for public action.

Section 1.3 explores the state of the art in traditional cost-benefit analysis for evaluating policies and projects with the intent to deal with market failure, and introduces the gaps that need further work. Section 1.4, for instance, argues that cost-benefit analysis should not stop at putting a price on environmental values that are overlooked as external economies and diseconomies or incomplete property rights in market coordination (Baumol and Oates 1988: 26). It should also reveal how total costs and benefit are distributed over (groups of) citizens, since fairness in distribution is a necessary condition for acceptability by the people affected. Section 1.5, however, holds an early warning to leave well-enough alone, and offers short cuts in case a full cost-benefits analysis is not necessary or feasible. Furthermore, it qualifies the relevance of the ‘ideal’ world as introduced in Section 1.2 in which ‘perfect’ competition would create perfect markets, yielding prices as reliable indicators of scarcities. In real life, competition is imperfect, not just because externalities are overlooked, but also when entrepreneurs have scope to behave as ‘rent seekers’, driving up profit margins. Section 1.6 introduces the carrying capacity or environmental utilization space as an ecological constraint on economic development. It cautions, moreover, that while in developed economies cost-benefit analysis is well-grounded on a local and national scale, most of the big ecological issues, such as global warming, water management and desertification require a closely monitored global governance, a problem that will be further developed in Section 4.4.

Chapter 2 elaborates in nine sections on how sustainable solutions may be valued without attributing results to individual beneficiaries, on the basis of a wide range of solutions, starting circumstantial evidence of consumer preference derived from the actual functioning of economic systems, and gradually moving towards top-down management by speech and imposition of ‘planners’ preferences’.

Chapter 3 briefly introduces the basic descriptive concepts of distributing costs and benefits across individuals and social groups in fiscal solutions and distributional weights before ending, in Section 3.4, with an introduction to the leading normative visions of justice in political philosophy, concentrating on the seminal contributions of John Rawls (1971; 2001 and 2005) and Amartya Sen (1973; 1985; 1999 and 2009).

Chapter 4 starts out, in Section 4.1, with casting cost-benefit-analysis in the procedural mould of public administration. Section 4.2 makes a general plea to manage the information needed in today’s complex processes of governance in a properly incentivized and interactive style of decision-making. To that effect, Section 4.3 breaks new ground by introducing the situational contract as a way of bringing demand and supply together in reciprocity, bonding and accountability, and to induce politicians to be explicit on actions to be taken, nationally and internationally. Within that broader perspective, Section 4.4 explains the relevance of the situational contract in implementing Sen’s Idea of Justice (2009) in the valuation and framing of distributive concerns in environmental policy, and to commit partners in implementation. In Section 4.5, the book concludes that, although economic analysis cannot judge the fairness of solutions, the proposed mechanism design of situational contracting can reveal the prevailing notions of fairness and confront politicians with their responsibility to order values for society, as a crucial condition for collaborative governance (Emerson et al. 2012: 17).

1.2Economic analysis of environmental policy: scope and limits

The mainstream in the economic way of thinking starts out from an imaginary system of perfect markets as an ideal state for establishing value and dealing with scarcity, efficiency (least-cost solutions) and effectiveness (optimal results) in the use of resources. Markets are ‘perfect’ when (1) all scarcities throughout the economy are priced, and operate as compatible incentives, (2) competition can be relied upon to drive out economic power, (3) economic actors are, on the whole, capable of valuing and ordering their preferences, (4) transactions are excludable, meaning no pay, no deal for parties that are not able or willing to deliver (Shleifer 1998), and (5) the scale of supply is adjustable or divisible to match with demand (more about non-excludability and indivisibility in the discussion of Figure 1.1, later in this section).

Costs are seen as opportunity costs that express the benefits or opportunities forgone by spending scarce resources such as money or expertise on private goods and services or public programmes and projects considered. Scarcity and opportunity costing are the core concepts of economic analysis. In short, economic theory explores how people deal with scarcity in pursuing their objectives, against a background of a hopefully comprehensive set of ‘perfect’ markets as a socially efficient counterfactual or conceptual measuring rod of economic performance.

In an ideal state of perfect markets and opportunity costing, markets are supposed to clear demand and supply at the point where the marginal benefit of an additional unit demanded equals its additional or marginal costs. Demand and supply are recognized to be sensitive (‘elastic’) or insensitive (‘inelastic’) in its response to (changes in) prices. Note, however, that markets do not make decisions, people do. A leading theme in behavioural economics and in Chapter 4 of this book is that it’s not markets or hierarchies, but individuals that have objectives and make decisions, on their own account, or in the name of households, firms or other entities and institutions (Leibenstein 1980: 3), and that policymakers better take that into account. Markets and hierarchies just provide information on relative scarcities, as an input in decisions that individuals make in the use or resources (Burkhead and Miner 1971: 13). Similarly, in situations where markets are ‘missing’ (as in case of an incomplete coverage of scarce environmental values), actors in government or voluntary non-governmental associations (‘NGO’s) are supposed to extend fiscal interventions (taxes, charges and expenditure) to the point where marginal social benefits equal the burden of taxation and voluntary contributions, or resort to regulation. This way, a comprehensive system of perfect markets and supplementary governance would generate an ideal state of general equilibrium between demand and supply, throughout the economy, presuming that where markets fail and governments or voluntary associations step in, costs and benefits are equated at the margin as well.

In short, general equilibrium denotes an optimal or best-achievable state of efficiency of the economic system here and now, but not necessarily its fairness in distribution, nor its sustainability over time, as it only reveals the preferences of present generations. Hence the need for political decisions to be specific about the way in which possibly endangered social values regarding fairness and sustainability are to be dealt with.

In terms of behavioural assumptions, traditional economics views people as ‘self-interested’ and ‘rational’, two hypotheses that have been further developed over time. Nowadays, rationality is still understood as the capacity to order one’s preferences, but with room for wide range of motivations such as altruism and commitment as well, in an emerging field of ‘behavioural economics’ (Kahneman 2003; Cartwright 2011). Rationality then refers to the quality of method in a process of appropriate deliberation, rather than perfection in outcome: owing to chance, good method may not always lead to good result (Hirschleifer 1985: 59). Appropriateness here implies that people also take the cost of deliberation into consideration. With reference to the fable of the mule that starves between two stacks of hay because he cannot decide where to start eating, economists would consider the poor animal irrational. With regard to the efficiency of deliberation, Simon (1976; 1979) introduced the notion of satisficing behaviour, in which rational people may leave well-enough alone and follow routines in ‘bounded rationality’ to economize on transaction costs. Transaction costs include the ex-ante search costs of finding partners to deal with, the cost of negotiating and safeguarding an agreement, and the ex post costs of maladaptation and adjustment when something goes wrong in the execution of the contract (Williamson 1996; Cornelisse and Thorbecke 2010).

Advances in psychology and behavioural economics have meanwhile generated empirical evidence that people are driven by a wide scale of motivations, may cut a corner taking routinized decisions in satisficing behaviour and, more generally, may have difficulty in sorting out where they want to go and what they want to get (Kahneman et al. 1997; Jilke (2015: 148), for instance, shows that users of public services differ in their ability to make choices. Our well-being, moreover, derives not so much from states, but rather from changes in states. Most of us mind a loss in well-being more than enjoy a gain of a similar size and quality (Rabin 1998: 20; Kahneman 2003: 1454–1456). This ‘endowment effect’ means that people mind a loss of natural habitat, e.g., more than they appreciate a compensating effort in conservation.

What still stands of the predominant paradigm of ‘mainstream’ or ‘neo-classical’ economics is a penchant for subjectivism in looking for the key to individual utility or satisfaction. The primary focus is on what individual people want, as presumably ‘sovereign’ consumers in markets and citizens in democracies. In this perspective, politicians who want to impose preferences for ‘merit goods’ – goods and services that they consider undervalued by the public – have explaining to do, in an accountability that will be a leading theme in this book.

Recall, moreover, that we are still dealing here with an imaginary system of perfect markets as a conceptual edifice to structure our thoughts. In real life, of course, markets are far from perfect, but the notions and tools described above allow us to generate two important conceptual results regarding the way an ideal economic system would work: (1) that the additional or marginal utility or satisfaction derived from an increase in goods or services tends to decline when people get more of the same, and (2) the assumption that people try to equalize the marginal utilities derived from the various items they spend their resources on, individually or collectively; two basic planks of economics known as Gossen’s First and Second Law (Blaug 1978: 315–322). The First Law, of a declining marginal utility, is – by and large – supported by empirical evidence; the Second Law is a plausible assumption, and ...