Making Environmental Markets Work

The Varieties of Capitalism in Emerging Economies

Tabitha M. Benney

• Publisher: Taylor & Francis
• Year: 2014
• Print ISBN: 9781138806986
• eBook ISBN: 9781317614807
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Environment & Energy Policy
• Index: Politics & International Relations

Perhaps the most defining characteristic of the global economy today is the rise of emerging market economies (EMEs). Many states have experienced rapid economic growth over the past two decades that has led to an increasing share of global wealth. Such dramatic changes are highly relevant because they raise important issues about the distribution of global monetary and fiscal power. As the EMEs have gained importance in the global economy, their influence and significance have grown across a wide range of policy domains. One particularly relevant example is the increasingly critical role of EMEs in addressing climate change.

Contrary to the popular belief that the level of development determines a country's ability to produce positive environmental outcomes, this book shows that the variation in environmental outcomes among the EMEs is due to differences in the types of economic institutions prevalent in their economies. Since EMEs differ dramatically on a number of variables, examining national variations in economic institutions helps explain why international climate policy has been more successful in some countries than in others. To assess how variations in capitalism may influence important outcomes, this book explores a representative sample of 31 EMEs and employs a mixed method research design that incorporates both conventional regression analysis and Qualitative Comparative Analysis (QCA) to explain these outcomes. The analysis shows that although liberal market economies were expected to perform better than other types of capitalism, their performance fell below expectations. On the contrary, economic institutions related to coordinated types of capitalism (like those found in China and Brazil) have led to greater Clean Development Mechanism (CDM) market participation.

Theoretically informed, this book employs innovative ways of understanding a broad set of increasingly important but under studied states in an effort to highlight the interactions found in complex socio-political and ecological systems. With the growing importance of the EMEs, a better understanding of how to design market-based policies with them in mind will be required if future efforts across a range of policy issues are to be meaningful and effective.

1
Introduction and Overview

I. Introduction and Overview

Perhaps the most defining characteristic of the global economy today is the rise of the emerging market economies (EMEs). In fact, the aggregate output of these states has the potential to exceed that of most industrialized countries, but per capita income levels remain far lower. The rapid economic growth that results from these conditions has led to an increasing share of global wealth for many of these states. If this trend persists, we shall witness the most impressive closing of the gap between rich and poor countries in world history. Such dramatic changes are highly relevant because they raise important issues about the distribution of global monetary and fiscal power. This is especially relevant in a world where the richest states often define international policy, yet are also largely held accountable for their costs.

As the EMEs have gained importance in the global economy, their influence and significance have grown across a wide range of policy domains. One particularly relevant example is the increasingly critical role of EMEs in addressing climate change. Indeed, it is widely believed that developing countries’ participation is required for a truly effective solution to global warming. This is particularly relevant now that emissions levels from the developing world are expected to outpace their post-industrial counterparts over the next three decades due to their generally stronger rate of economic growth and continued use of fossil fuels.¹ Not only are these states increasingly responsible for the ongoing problem, they also have great potential for solving it. For instance, the Organization of Economic Cooperation and Development (OECD) speculates that emissions-reducing projects in the developing world alone have the potential to contribute over 50 percent of the total emissions reductions mandated by the Kyoto Protocol (OECD 2000). Despite this great potential, most EMEs have more immediate priorities than climate change. With that in mind, a variety of international policies have been designed to directly target, incentivize and encourage the emerging economies to control their growing emissions.

One such policy was established by the United Nations Framework Convention on Climate Change (UNFCCC) under the Kyoto Protocol in 1997. As is commonly understood, the objective of the Kyoto Protocol was to stabilize greenhouse gas (GHG) emissions at a level that would prevent dangerous anthropogenic interference with the climate system. To address its goals, the Kyoto framework required the more advanced economies (known as Annex I countries) to limit or reduce their GHG emissions. However, the industrialized world could not go it alone.

To encourage developing countries, negotiators of the Kyoto Protocol also established a global market for emissions reductions² through a market-based mechanism called the Clean Development Mechanism (CDM). The dual goals of the CDM are to promote sustainable development in emerging economies and to allow industrialized countries to earn emissions credits from their investments in emissions-reducing projects in developing countries. The CDM program works like a subsidy to offset the cost of pollution-reducing technologies in the developing world. By funding “green” technologies and encouraging cleaner technology updates, developing states are expected to be swayed to emit less emissions overall.

The use of markets as a means to address environmental problems is not a new idea. Economists have long encouraged the use of market-based policy instruments to address environmental problems because they are seen as a fast and efficient course of action that is capable of transcending national boundaries effectively. In reflection of this, market-based policy mechanisms like the CDM that serve to protect the environment through market principles are increasingly being advocated (Keohane and Olmstead 2007).³

However, little is actually understood about how such markets enable states to address environmental problems. As the CDM has run its course, responses to the policy have been extremely varied. Some countries, like China, embraced the mechanisms, whereas others, like South Africa or the United Arab Emirates (UAE), barely participated in it. With the growing importance of the EMEs, a better understanding of how to design market-based policies with them in mind will be required if future efforts across a range of issues are to be meaningful and effective. How, then, can we best account for the variations we find among the emerging economies?

This book argues that the variation in environmental outcomes among the EMEs is due to differences in the types of economic institutions prevalent in their economies. In short, it is the type of capitalism in each country that explains this outcome. This occurs because countries are comprised of varying sets of economic institutions and these institutions supply the rules of the game for how the country performs in many areas, including environmental policy. Because EMEs differ dramatically on a number of variables, national variations in economic institutions help explain why international climate policy has been more successful in some countries than in others.

A common starting point for understanding the importance of economic institutions is the work of Karl Polanyi (1944). It was Polanyi who first illustrated how the creation of capitalist institutions not only changed laws, but also molded society. He argued that with the advent of market-based institutions, human propensity to barter and trade became widespread. Since the 1940s, Polanyi’s (1944) institutional approach has been borrowed, modified and elaborated on by important contemporary scholars including Andrew Shonfield (1966), Peter Katzenstein (1974, 1985), Mark Granovetter (1985) and Oliver Williamson (1985). What these scholars have helped to illustrate is that economic institutions matter because they help define the environment in which actors make decisions.

Since the 1990s, the theory of economic institutions has been extended to show that it is not one specific area of the economy that produces economic outcomes, but rather the joint effects of a series of institutions that influence the economy together (Evans 1995; Dobbin 1994; Scott 1995, 2001; Hall and Soskice 2001). These sets of institutions vary by country as a result of their unique histories and experiences. Despite the variation in their domestic institutions, states often arrive at similar outcomes in areas such as national savings rates, employment levels and even how new markets form. Understanding these sets of economic institutions can help to explain why a particular policy outcome results.

A. Goals of this Research

To better understand how sets of economic institutions influence environmental outcomes among the EMEs, this research has four main goals. The first goal is to systematically understand what the emerging economies are really like. According to the World Bank, the BRIC states (Brazil, Russia, India, China) plus South Korea and Indonesia will lead the world’s economy with more than a half of all global growth by 2025 (World Bank 2011). In addition, unlike the early industrializers that took over a hundred years to mature, even the most unlikely emerging markets today have the potential to rise to the top in one to two decades. Despite this, comparative studies of market structures in EMEs are sparse, even as these states continue to play an increasing role in the world’s economy. Not only are these states the future drivers of markets and policies, but their participation will be essential for solving a broad range of issues at the international level. As such, they deserve further research.

The second goal of this research is to better understand market-based policy performance. In particular, I explore what types of capitalism produced positive outcomes in the case of the CDM. To do so, I study the creation or formation of CDM markets across the EMEs beginning in 2005 when the program was implemented. This serves to inform the literature on the use of market-based policy mechanisms to resolve important global problems. By focusing attention on how best to implement such policies, this study can provide insights on the best practices for solving large-scale international problems like climate change.

The third goal of this research is to explore whether economic institutions alone determine environmental outcomes. What factors are necessary and/or sufficient for influencing EMEs in the process of market formation? Although this research assumes a rationalist approach to economic institutions, in the spirit of Karl Polanyi (1944)—it is important also to question the latent functionalism of institutionalist approaches if further inroads are to be made in the field of comparative capitalism. To address this, I explore a set of controls derived from the development literature. They include the following four variables: macroeconomic stability, infrastructure, strength of public institutions (including corruption, judicial transparency and rule of law) and the unique effects of population. Because EMEs may have different priorities from their industrialized counterparts, I aim to clarify what “other” factors matter for producing successful market-based initiatives such as the CDM. This has the potential to illustrate what motivates EMEs and how to best design market-based policies that work specifically for these states.

The final goal, which is more methodological in nature, is to demonstrate the strengths and weaknesses of mixed-method research designs for furthering our understanding of international and global politics. A particular focus of this research is to assess the effectiveness of innovative approaches, such as Qualitative Comparative Analysis (QCA)—one of the methods used in this research. QCA is an analytical technique that uses logic to derive the various pathways to a common outcome. By comparing the findings of this method with a more conventional statistical procedure, I hope to highlight important benefits of QCA that may prove fruitful for understanding how complex, socio-political and ecological systems interact.

B. Data and Methods

To achieve these goals, this book explores a representative sample of 31 EMEs to show that national variations in capitalist economies are central to explaining why CDM market formation has yielded more emissions-reducing projects in some countries than in others. The analysis for this research draws on explanatory variables from the Varieties of Capitalism (VoC) literature, which suggest that firms in capitalist economies face common problems related to labor relations, finance, inter-firm relations, education and vocational training and corporate governance (Hall and Soskice 2001). Control variables including macroeconomic stability, infrastructure, strength of public institutions and population are also considered in the analysis. These five dimensions, along with four control variables, will be operationalized to produce a series of indicators to explain the successful or unsuccessful creation of CDM markets in these states.

To analyze the data, I employ a mixed-method research design that incorporates both conventional regression analysis and QCA as complementary tools for explaining these outcomes. In doing so, I hope to illustrate the similarities and differences between these two methodological approaches. My goal is not to suggest these findings will hold across all types of research designs, but I evaluate these two methodologies across a particular type of research design—a comparative mixed-method analysis that focuses on testing asymmetric hypotheses⁴ for a medium-n size sample. In such settings, QCA has important advantages when combined with conventional regression methods and together can produce more meaningful results.

C. Overview of the Book

The book is organized as follows. Chapter 2 begins with an overview of the emerging economies and the international system of classification used to label them. This chapter also explores the competing drivers of market-based environmental policies in these countries. The most common drivers or explanations for environmental outcomes focus on a country’s level of development, type of political system or their national environmental values; however, these approaches may not be best suited for understanding the transboundary nature of GHG emissions in the developing world.

I begin the third chapter by introducing the comparative capitalism approach, which I argue is a more compelling explanation for the environmental outcomes found in this research. The chapter also includes a review of the VoC, which serves as the framework for this study. An overview of the relevant debates is provided, touching on issues such as the classification of capitalist types, the narrow application of the theory to industrialized states and the effect of differing types of capitalism on important outcomes such as the environment. I conclude the chapter with a brief discussion of the innovations and contributions of this research.

Chapter 4 explores how various sets of economic institutions perform in market-based policies used to incentivize new market formation. To illustrate the conceptual framework of this book the chapter begins with an overview of the CDM, the environmental policy explored in this book. Next, the definition of capitalism is conceptualized and operationalized to help establish a research protocol. The chapter concludes with a brief discussion on data sources and types.

In the second half of the book, I present my research design, analysis, findings and conclusions. Chapter 5 explores the dynamic nature of capitalism among the emerging economies. A typology is used to establish an inventory of the varieties of capitalism found among the states in my sample. I also explore which types of capitalism produce the best environmental outcomes. The chapter concludes with some thoughts on the long-running debate over the divergence or convergence of capitalist norms.

Chapter 6 provides an overview and demonstration of the QCA approach. First, a brief history of this increasingly popular method is described. The main goal of this chapter is to provide a step-by-step illustration of the QCA research process and protocol using the data for this research. Key concepts, data instruments and rules of the method are defined and illustrated.

The seventh chapter of this book explores the argument that an explanation for the success and failure of CDM market creation is likely due to the variation in capitalist institutions among the EMEs. The chapter includes an introduction of the mixed-method research design used in this research. The complementary of these two methods is also discussed. Next, I provide a comparison of the analysis produced by each method individually. I also present my final analysis of the determinates of CDM market formation.

Chapter 8 explores the findings, limitations and practical implications of this study. Contrary to the popular belief that the level of development determines a country’s ability to produce positive environmental outcomes, I conclude that differences in CDM market performance (at least as it has been defined in this research) appear to be directly linked to the type of capitalism in these states. I also find that although liberal market economies were expected to perform better than other types of capitalism—because carbon markets were designed with market-based economies in mind—their performance was below expectations. Furthermore, I find that economic institutions associated with coordinated types of capitalism (like those found in China and Brazil) has led to greater CDM market participation. The underlying mechanism explaining this outcome relates to the distinct time horizon of economic decision making in the two main types of capitalism, and to how the sets of institutions within them work to facilitate the production process.

The final chapter of the book summarizes the main conclusions and provides a brief discussion on the future of this important area of research. In addition to being theoretically informed, this book presents an innovative way of understanding a broad set of increasingly important states to highlight the real interactions found within them. By mapping CDM market performance (i.e. CDM market creation) to the diversity of capitalist types, this research provides new insights into the debate over institutional influences on market behavior within emerging economies where studies remain sparse. In my research, for example, economic institutions do appear to play a central part in determining outcomes, as is predicted in the VoC theory. Nonetheless, in some cases, other factors such as high population levels and macroeconomic stability may also play a role in the success of CDM market formation. Despite this, the VoC theory remains a fruitful construct for explaining the evidence that results.

In the case of the CDM, positive performance is linked to a particular type or mode of capitalist production, which suggests that current international policy designs to address climate change may be shortsighted. If specific types of capitalism require differing forms of motivation to bring about the desired policy outcome, then current efforts to address climate change may need to adapt. Even though these findings remain preliminary, the evidence presented in this research raises important issues for further research. To address these issues, new theories, research methods, and related typologie...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of Figures
• List of Tables
• Acknowledgements
• 1 Introduction and Overview
• 2 Understanding the Emerging Market Economies
• 3 Theories of Comparative Capitalism
• 4 Measuring Environmental Outcomes of Capitalism
• 5 Varieties of Capitalism (VoC) in the Developing World
• 6 The Qualitative Comparative Analysis (QCA) Research Process
• 7 Determinates of Market Formation: Applying a Mixed-Method Approach
• 8 Findings and Implications
• 9 Conclusions and Implications for Future Research
• Appendix
• References
• Index