The Economics of the Environment

Of late, hues and cries are being heard in relation to the Environment. A crisis is impending. The Environment plays an important role in every economy. The recent HDR 2006 stresses on ‘Climate Crisis’.

Developments, a magazine produced by the Department for International Development (DFID) brings out some alarming statistics to show how ‘climate change’ threatens the world’s poor.

1) 97% of all deaths from natural disasters are in poor countries.
2) Longer rainy seasons have already led to increased malaria in parts of Rwanda and Tanzania.
3) Over 3 billion people in the Middle East and the Indian sub-continent could be facing acute shortages of water-affecting productivity and jobs.
4) Climate change brings the risk of increases in serious diseases such as malaria, dengue, yellow fever and polio.
5) A temperature rise of 2-3.5 degree Celsius would reduce farmers’ incomes by between 9 and 25%.
6) The area of the world stricken by drought has doubled between 1970 and the early 2000s.
7) There are over a billion people living without access to clean, safe water and 2.6 billion people have nowhere to go to the toilet.

These numbers prove that the ecosystem has been seriously affected by various kinds of pollution. This also warrants the need for generating energy using environmental-friendly methods.

India and the Environment

Studies conducted by WWF, available exclusively with CNN-IBN reveal that the Gangotri glacier is receding at an alarming average rate of 23 meters every year. [Iyer 2006] Glaciers are considered to be indicators of Global Warming.

Orissa enjoys unrivalled natural resources and have proved attractive to industrial giants. It has the highest overall poverty ratio in the country, with 48% living below the poverty line; its level of infectious diseases and malnutrition is alarming; it is particularly prone to natural disasters, such as cyclones and floods, says Prodeepta Das in his article ‘Counting the cost’ in Developments.

India on Tuesday became part of a seven-member international consortium to launch a multi-billion dollar experimental fusion reactor called ITER. The aim of the research reactor is to create fusion technologies that could emulate the power of the sun, that is, to develop a source of limitless, clean energy. [Naravane 2006]

It is of utmost importance that India strives to undertake research in resource economics so as to develop processes which will prove to be environment friendly. Jonathon Porritt, in his article in Developments titled ‘Capitalism for the poor?’ posits that “The end of cheap oil means the end of easy economic growth.” Thus it is important that nations start finding alternative avenues to harness energy.

Green Tax: The state of Andhra Pradesh is introducing ‘green tax’ from 27th of November. This will be levied on vehicles which have been in use for 15 years and above. The revenue from this would be used for pollution control activities. This is a very beneficial tax which needs to be introduced in the whole of India.

Environmental protection efforts

The 1997 Kyoto Protocol expects it’s signatories to limit or reduce their greenhouse gas emissions. This protocol is yet to be ratified by many of the ‘major polluting’ nations.

The film ‘An Inconvenient Truth’ directed by Davis Guggenheim and featuring Al Gore portrays the effects of global warming and its related hazards.

Many multinational and transnational companies are involved in such environmental protection. The effects of such activities are yet to be seen.

Concepts in Environmental Economics

Environmental economics is concerned with the impact of the economy on the environment, the significance of the environment to the economy, and the appropriate way of regulating economic activity so that balance is achieved among environmental, economic and other social goals. [Kolstad 1999]

Pigovian tax:
Early in the twentieth century the English economist Arthur C. Pigou argued for the imposition of taxes on generators of pollution. Since the social cost of pollution is in excess of the private cost to the polluter, the government should intervene with a tax, making pollution more costly to the polluter. If the pollution is more costly to produce, the polluter will produce less pollution. This tax has come to be called a Pigovian fee or Pigovian tax. [Ibid]

Other concepts like Coase theorem (Ronald H. Coase, Nobel winner of 1991), Ratchet effect are also present. The ratchet effect occurs when the regulator has incomplete knowledge of the firms’ costs and the two must repeatedly interact. [Ibid]


Thus it is indeed in the interest of everyone to protect the environment. Planting trees, abstaining from burning plastic, reducing travel by vehicles whenever possible are some of the things we could do to reduce pollution. Environmental hazards have a significant impact on the economy and in particular those of the poor countries. Though most of the pollution is done by the advanced countries, it is the ‘other countries’ which mostly bear the brunt.

Resources on Environmental economics

1) Environmental Economics (Blog)
2) Association of Environmental and Resource Economists (AERE)
3) Economist’s view (Blog)

Further Links

1) Creative Taxing Can Save the Environment  

2) STERN REVIEW: The Economics of Climate Change

Economics and Karl Marx

History is economics in action.” – Karl Marx

The discipline of Economics has been improved upon by many individuals who have not been economists. One among them is Karl Marx (1818-83). Marx contributed to sociology, history, philosophy, literature and even arts. This article tries to bring out to the fore a few of his contributions and criticisms regarding Economics.

Marx’s theories revolved around the relationship between capitalist and worker. He posited that this relationship is an unstable one, as each sees the other as a rival. During his time, money and bargaining was associated with the Jews and they dominated the society. Marx suggested a reorganisation of society so as to do away with the evils of bargaining, which almost eventually resulted in the worker getting exploited.

The property owning middle class could win freedom for themselves on the basis of rights to poverty- thus excluding others from the freedom they gain- the property less working class possess nothing but their title as humanity. Such was Marx’s view of the exploited proletariat. Marx claimed that ‘total deprivation’ was a universal characteristic of the proletariat. [Singer 2006]

Marx began his critical study of economics in 1844. Marx criticised classical economic theories stating that they characterised worker as a commodity, the production of which is subject to the ordinary laws of supply and demand. [Singer 2006]

Marx contended that the main problems in the economy were caused due to the unequal ownership of private property. He wanted to abolish private property and to also regulate production. The solution he gave was ‘Communism’ in the ‘Communist Manifesto’ written jointly with Friedrich Engels. He also viewed the labourer and their labour as one. And one of the questions he posed was whether the labour was more important than the labourer.

Theory of Surplus value

Surplus-value is the social product which is over and above what is required for the producers to live.

The measure of value is labour time, so surplus value is the accumulated product of the unpaid labour time of the producers. In bourgeois society, surplus value is acquired by the capitalist in the form of profit: the capitalist owns the means of production as Private Property, so the workers have no choice but to sell their labour-power to the capitalists in order to live. The capitalist then owns not only the means of production, and the workers’ labour-power which he has bought to use in production, but the product as well. After paying wages, the capitalist then becomes the owner of the surplus value, over and above the value of the workers’ labour-power.

The capitalists may increase the amount of surplus value extracted from the working class by two means: (1) by absolute surplus value – extending the working day as long as possible, and (2) by relative surplus value – by cutting wages.

On Division of Labour

Marx talked about the ill effects of Specialization. He posited that increasing division of labour eliminates intellectual and manual skill and reduces the labourer to a mere appendage to a machine. [Singer 2006]

Looking at this statement, I feel it holds good even now. If a labourer could learn two or more trades, it is possible for him to perform efficiently in all the trades, except for the fact that, he would not be able to devote his entire time to a single trade. In this age, seldom do we come across people who are economists as well as physicists or historians as well as doctors, etc. ‘Specialization’ is said to be the need for the day.

Taking the case of a manual labourer in India, if he knows two trades, he would be better off. The labourer will be in a better bargaining position than otherwise.


Marx was of the view that we need to produce things for their use-value and not for their exchange-value. This is what he tried to achieve by Communism. But Communism rendered human inventions and innovations as useless. Though, people all had the basic necessities of life, they did not have the motivation or the zeal to bring out the best in them.

His insights of Classical Political Economy are laudable. A science progresses when it is criticized and when it gets defended.

Writings in Economics

1) Das Kapital
2) Critique of Political Economy
3) Grundrisse


1] Marx: A very short introduction-Peter Singer
2] Encyclopedia of Marxism

HDR 2006 and India

The Human Development Report for the year 2006 has been released. This year’s HDI refers to 2004.India has moved one step up to be ranked 126 among a total of 177 countries. [Last year India was ranked 127] India’s HDI rank falls under the category of ‘medium human development countries’.

The HDI provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and enrolment at the primary, secondary and tertiary level) and having a decent standard of living (measured by purchasing power parity, PPP, income). The index is not in any sense a comprehensive measure of human development. It does not, for example, include important indicators such as inequality and difficult to measure indicators like respect for human rights and political freedoms. What it does provide is a broadened prism for viewing human progress and the complex relationship between income and well-being. Read more on HDI here.

HDI Rankings

Norway is ranked first in this year’s HDR report, while the USA is ranked 8th, Japan 7th, China 81st and Pakistan 134th. And Niger is ranked last at 177.

India: Human Development [A few indicators]

1) HDI Rank: 126

2) The population below income poverty line of 2$ per day is 79.9%, though as per the national poverty line it is 28.6%.

3) The HPI (Human Poverty Index) for the 102 developing countries rank India at 55.

4) The Annual Population growth rate is pegged at a rate of 1.3%. [2004-15]

5) The Public health expenditure of India as a percentage of GDP is 1.2%, while that of the private is 3.6%. [2003]

6) The percentage of total population who are undernourished is 20%. [2001/03]

7) Life expectancy at birth: 63.1 [2000-05]

8] Infant mortality rate per 1000 live births: 62 [2004]

9) The public expenditure on Education as a per cent of GDP is 3.3% [2002-04] which has fallen from 3.7% in 1991.

An irony

“Only 25% of the poorest households in developing countries have access to piped water in their homes as compared to 85% of the richest households.” Says HDR 2006.

The same report states that only 14% of people in India lack access to an improved water source. This implies that 86% of people in India have access to improved water, thereby rendering India almost in par with developed countries in terms of access to an improved water source. This figure has been definitely deflated. One of the major reasons for this deflated figure is due to lack of adequate and complete statistics.


The HDI alone or the GDP alone cannot give the real picture of any economy. Both the HDI and the GDP do not take into account the inequalities. India is a country which is characterised by stark inequalities in wealth, income, education, health, land etc. India is the land of the billionaires as well as people who go hungry everyday and the land where little children are forced to work.

The authorities’ rhetoric of trickle down effects of an 8% GDP will not work, due to lack of proper institutions to cater to the needs of the poor. Microfinance, an institution which is working needs to be implemented more effectively and in a transparent manner, because the misuse of Microfinance institutions can lead to more trouble than not having them at all.

The main focus of this year’s HDR is on the Water Crisis which is plaguing countries both developed and developing alike. Adverse effects of pollution, increased green house gases can be witnessed in unanticipated floods and droughts plaguing many countries. And in the last few years, we had to face the Tsunami which wreaked havoc. According to Developments, “97% of all the deaths from natural disasters are in poor countries”.

The Indian populace has been repeatedly told that India is reducing its poverty and that it is well under 30%. They are right. [According to the official poverty line of a dollar per day] But keeping in mind the needs of the people for a decent livelihood, a family needs at least an income of 2000 rupees per month!

On the whole, there is nothing in the report that makes India proud. India needs to step up its expenditure specifically targeting education and health sectors. The draft to the 11th 5 year plan, speaks about inclusive growth, but adequate emphasis has not been given to sectors which need development.


1) Human Development Report 2006

The Real Economy of India

Economy: Main Constituents

Agriculture sector or otherwise known as the ‘primary sector’ comprises agriculture and allied activities like crop production, horticulture, plantation crops, farm mechanization, land development and reclamation, digging of wells, tube wells and irrigation projects, forestry, construction of cold storages and warehouses, processing of agri-products, finance to agri-input dealers, allied activities like dairy, fisheries, poultry, sheep-goat, piggery and rearing of silk worms.

Industrial sector or the Secondary sector consists mainly of mining and quarrying; manufacturing and electricity; gas and supply.

The services sector or the tertiary sector includes trade, hotels, restaurants, transport storage and communication; financing, insurance, real estate and business services; community, social and personal services and construction.

Gross Domestic Product(GDP)

According to the Central Statistical Organisation (CSO), the Indian economy recorded a real GDP growth of 8.0 per cent in the second quarter of 2005-06.

When an economy grows at, say 5 %, it implies that the average growth of the 3 sectors within the economy, namely agriculture, industrial and services are growing at an average rate of 5%.

The data by CSO says that, the agricultural growth in real terms during the second quarter (July-September) of 2005-06, is 2.0; industrial sector 7.6 and tertiary sector 9.8.

The slow growth of the primary sector has been mainly attributed to the weak monsoons.

Business Expectation: A digression

Business expectation surveys suggest that the current phase of industrial activity is likely to continue in the near future. According to the Reserve Bank’s latest Industrial Outlook Survey, the Business Expectations Index for January-March 2006 quarter increased by 2.4 per cent over the previous quarter. Survey results indicate that employment, selling prices, imports and profit margins are expected to improve during the quarter January-March 2006 vis-à-vis October-December 2005.

What the ‘growth’ comprises

The area under kharif crops was 1.2 per cent higher than a year ago, led by increased area under rice, maize, pulses and sugarcane. As regards rabi crops, the area coverage as on January 2, 2006 was 1.5 per cent higher than a year ago on account of increased coverage in respect of major crops such as wheat and rapeseed.

The mining and electricity sectors, on the other hand, recorded a deceleration. The sharp slowdown in the mining sector may be attributable in part to a decline in production of crude oil caused by the break-out of fire in the Mumbai-High oil field in July 2005 and the adverse impact of heavy rainfall on coal mining activities. Lower growth in the electricity sector is attributable to shortage of coal and gas.

Robust growth in the cellular subscriber base broadband connections supported the strong growth in the communication sector.

Sustained growth in bank deposits and non-food credit as well as increased exports of information technology enabled services boosted the sub-sector ‘financing, insurance, real estate and business services’.

These are some of the reasons mentioned by the RBI for the growth in real GDP.

Growth projections

Agencies like ADB, CII, CRISIL, NCAER, IMF and RBI have projected the Real Gross Domestic Product for India during 2005-06 to be over and around 7.0. This reflects a bright prospect for the people of India. Is it so?

Current Scene

Link: The Hindu


The current GDP rate is exuberating and so are the projections. All the hype is on the growth rate. The politicians’ rhetoric is that India is growing as its GDP is rising. The agricultural sector is weak, structurally. More reason to be worried is because of the fact that more than 50% of the Indian populace are dependent on agriculture for their livelihood. The number of farmer suicides in Vidarbha and even in highly literate states like Kerala, speaks of discontentment. Relying only on the GDP and expecting the ‘trickle down effects’ to comply is nonsensical. Even if the high rates of GDP brought forth positive externalities, the time lag required for ‘these benefits’ to reach the masses would be large.

It is a commendable and laudable fact that India is improving it’s IT related exports. IT sector definitely seems resplendent.

Even if ‘trickle down effects’ ensued, all the benefits have gone to the middle class sector. More people are becoming better off with this sector.

The main concern is that of sustaining the realised growth of services and improving upon the primary and secondary sectors. The issue of ‘sustainable development’ should be our main concern. Lop sided development cannot be sustainable in the long run. Therefore, resting on a weak agricultural base is dangerous.


1) RBI: Third Quarter Review 2005-06, The Real Economy .