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Man and Nature in Developing Countries

Periodic Reporting for period 2 - MANANDNATURE (Man and Nature in Developing Countries)

Reporting period: 2019-06-01 to 2020-11-30

We are at a cross-roads in history when there is an urgent need to reconsider the relationship between humans and nature. Nowhere is this need felt more keenly than in developing countries. Here economic growth is urgently required to lift close to a billion people out of extreme poverty by 2030 (Target 1.1 of the 2015 UN Sustainable Development Goals). The necessary shift from primary production (agriculture, forests, fisheries) to manufacturing and services simultaneously raises incomes and makes people less susceptible to the vagaries of weather (see Figure 1). However, history tells us that this shift cannot take place without natural resource extraction and energy consumption increasing dramatically.

Indeed, future growth in natural resource extraction and energy consumption will occur mainly in developing countries. The negative externalities this growth creates – through degradation of the world’s forests and oceans, pollution, and climate change – will affect us all. How natural resources are managed and how energy use expands in developing countries are therefore issues of global importance which will fundamentally influence how the relationship between humans and nature develops in the coming decades.

The Advanced ERC Grant “Man and Nature in Developing Countries” has two main objectives. The first is to produce an impactful body of new knowledge in the area of economics of environment and energy. The second is to place environmental and energy challenges into the core of mainstream economics and economic policy by helping to grow the next generation of frontier scholars and by building a global community of scholars and policy makers interested in these issues.

Figure 1: Impact of Daily Temperature on Log All-Age Mortality Rates in India and the USA
Notes: The red (India) and blue (US) lines report 7 coefficient estimates (circle markers), representing the effect of a single day in each of the corresponding 7 temperature bins, relative to the effect of a day in the 70-74 F bin, on annual all-age log mortality rate. Dashed lines represent the 95% confidence interval of the estimates. The figure is taken from Burgess et al. (2018).
On natural resource management we are developing a new paper on deforestation in the Amazon, arguably one of the most important public goods in the world. Here we use satellite data along the full 12,800 km border of Brazil with its seven neighbours to test whether environmental policies in Brazil affect the rate of deforestation in Brazil relative to areas just across the border. We find clear evidence that Brazilian policies initially slowed the rate of deforestation but that these gains were reversed following the recent loosening of environmental regulations in Brazil. This paper opens the way to using border effects to evaluate environmental policies in a whole variety of other contexts.

In Indonesia, forest fires impose enormous environmental damages in terms of burnt acreage, particulate pollution, excess mortality and greenhouse gas emissions. Indeed, smogs from these fires often extend across South East Asia and in bad fire years daily emissions exceed that from all US economic activity. In a paper under development we are putting together a data set on the daily ignition and spread of over 100,000 forest fires in Indonesia. This enables us to show that, despite being illegal, the majority of these fires are manmade and are used to clear forest to make way for the production of palm oil, paper and pulp. Though firms are strategic in terms of when and where they set fires, existing public and private regulation of forest fires is shown to be largely ineffective. We are therefore using our analysis to explore how better policies to control fires can be designed.

The first two projects in this grant deal with tropical forests and the challenges of designing policies to conserve them. An even less explored and regulated area are the world’s oceans. Oceans provide many important economic benefits. They are the largest source of protein, support the livelihoods of over 3 billion people, and have a global market value estimated to be $3 trillion (5% of global GDP). Beyond direct market benefits they are also responsible for many of the chemical and ecological processes that keep us alive. They produce 50-85% of the world’s oxygen, sequester almost half of the world’s carbon dioxide, and harbor much of the planet’s biodiversity. However, the world’s oceans are also the largest open-access common pool resource, and there is now significant evidence that the oceans are becoming rapidly degraded over time.

The project we are developing looks at the effectiveness of a major regulatory tool which has been considered by governments and international agencies across the world: Marine Protected Areas (MPAs). These restrict the entry of fishing boats and extractive activities in clearly defined geographical spaces. The share of the world’s ocean that is covered by MPAs has been expanding quickly. However, there is little evidence on whether these are actually effective in practice. To this end, we use satellite data that allows us to trace the activities of over 70,000 commercial fishing vessels worldwide between 2012 and 2018. By superimposing the boundaries of MPAs over time on this vessel data we will be able to examine whether the creation of these areas, which are akin to national parks in terrestrial ecosystems, are effective in preventing fishing and whether they enable degraded parts of the ocean to become more productive.

The final project covered by this grant is on expanding access to electricity, a vital driver for growth and development. Access to reliable electricity helps individuals move into more productive jobs, frees up time spent working in the home, and can foster educational attainment. Because of its wide-ranging applications, energy acts as a spark that can set off development in rural areas. How this process unfolds - for instance, how the economies of rural areas change and evolve over time once they obtain electricity - is currently poorly understood. One reason for this limited understanding is that the grid has already been built in many areas around the globe, which restricts the amount of available variation that can be used to quantify electrification’s impact on the wider economy and assess the channels through which this occurs.

Our ERC project is set in Myanmar, a country which remains in energy poverty due to low state capacity over many decades, but where the government has recently embarked on a large-scale investment into expanding energy access throughout the country. As such, this research setting is somewhat uniquely poised to begin to tell us what value expanding access to reliable energy can have on the development process. To this end, we are collaborating directly with Myanmar’s Ministry of Electricity and Energy to design the path of grid expansion and employ secondary data to assess how this affects household and firm outcomes. This project is still very much in the implementation stage, but stands to provide important answers to the vital policy question of how a big push into expanding access to energy transforms rural economies. It also involves deep policy engagement on two fronts: (a) planning on how to build the national grid across the country in a budget efficient way and (b) advising on how the government should price its energy so as to achieve its dual mandate of expanding access while maintaining quality supply.

Concerning the objective of building a community of scholars working on the economics of environment and energy in the developing world, we have used the ERC grant to build a dedicated Research Lab within the Department of Economics at the LSE. This contains the PI Robin Burgess, the research manager and predoctoral research assistants involved in the ERC projects. It has been a catalyst in terms of generating work in this key area by drawing in faculty, both from across the Department of Economics but also from other universities across the globe. The setting up of the Lab using the ERC grant has been a catalyst for establishing the LSE Economics of Environment and Energy (EEE) Programme within the host institution STICERD and which is directed by the PI Robin Burgess. The ERC grant has therefore made this type of research a focal point within Europe’s top economics department.

The grant has also been important in terms of facilitating the setting up of an Energy and Environment Research Programme within the International Growth Centre (IGC) which Robin Burgess directs. This programme puts out open calls for research proposals centred on issues of energy and environment in developing countries and very importantly connects researchers to the 12 country offices of the IGC (Bangladesh, India, Myanmar and Pakistan in Asia and Ethiopia, Ghana, Liberia, Mozambique, Rwanda, Sierra Leone, Uganda and Zambia in Africa). This therefore encourages cogenerated research between researchers and policymakers of the type that is being conducted in Myanmar by the PI Robin Burgess.

Finally, the leadership positions that Robin Burgess holds as President of the Bureau for Research and Economic Analysis of Development (BREAD), Director of the Centre for Economic Policy Research (CEPR) development economics programme and his close collaboration with the Becker Friedman Institute (BFI) at the University of Chicago means that the ERC grant is also sparking the creation of a community of scholars who are working on the area of economics of environment and energy. Figure 2 illustrates how the ERC grant, which funds the Lab at the core of the figure, has catalysed a whole set of activities which will help to expand research in this under-examined area of work. And critically this work will outlast the life of the grant itself. In this way, the ERC grant is creating a larger impact than what is achievable purely through the financing of the four projects through the ERC grant. These organisations will also be of vital importance in terms of disseminating the results of the ERC grant in its later stages.
The four projects outlined above form the core of ERC Grant “Man and Nature in Developing Countries”. Work on these has sparked other projects over the past two and half years.

Working with Clare Balboni, the first research manager of the ERC grant who in 2019 moved to an Assistant Professor position at MIT, and Joe Shapiro at the University of California, Berkeley, the PI Robin Burgess has started a new project on trade in trash. What has come to their attention was that an enormous amount of trade in recycled goods occurs between Europe, the US and developing countries. China has recently decided to ban much of this trade, a move that forms part of an increasingly popular narrative that developed countries should be forced to process their own waste instead of exporting it. Sending waste to developing countries could see it illegally enter the environment or be processed with higher pollution costs, for example due to weaker regulatory standards and enforcement. For these reasons, it is possible that banning trade in recycled materials is welfare improving at a global level, contradicting the traditional result in economics that trade makes both parties better off. It is this precise question that this interesting new project, which arose directly from the set of collaborations financed by the ERC, seeks to tackle.

Another line of work, this time inspired by the ERC project on grid expansion in Myanmar, has been centred around the recognition that viewing electricity as a right might actually hinder access to electricity in a whole range of developing countries. When individuals fail to pay for electricity, it renders electricity distribution companies loss making and necessitates the rationing of electricity by the state. This leads to poor or patchy access for households and firms, with the universal 24-hour electricity that we are all used to in Europe being largely absent in the developing world. This realisation led the PI Robin Burgess to write up with co-authors Michael Greenstone and Anant Sudarshan from the University of Chicago and Nicholas Ryan from Yale University a paper titled “The Consequences of Treating Electricity as a Right”, which was published in the Journal of Economic Perspectives in Winter 2020.

Another activity in the area of access to energy which has progressed beyond what was anticipated in the proposal has involved the movement of the team working on Myanmar to Pakistan, where a similar bundle of electrification issues also apply. The Government of Pakistan has made reform of the energy sector a key priority. Based on the work they were carrying out in Myanmar and India, the PI Robin Burgess and collaborator Michael Greenstone were invited to visit the Pakistan in February 2019 and met with the Minister of Energy, Minister of Finance and the Prime Minister's Special Advisor on Energy Reforms. Since early 2019 we have had two full time economists embedded inside the Pakistan Ministry of Energy. Deeply integrated into the day-to-day operations of the government, our team on the ground has had numerous instances of policy impact that directly facilitate our growing research agenda in this engagement. One key area of focus is reforming the system of energy subsidies in the country as a means of improving its fiscal position. Savings in this area will also allow for subsidies to be better targeted than is the case today where the subsidies accrue mainly to richer households.

The final unexpected activity which was not envisaged in the proposal is that the setting up of the ERC lab combined with the establishment of the LSE EEE programme has allowed Robin Burgess to begin teaching a new PhD course on environmental economics in the LSE Department of Economics. This is designed to attract PhD students to working in this important area of research. The response to this offering has been extremely promising. This may become an important additional means of getting a larger number of frontier economists in the world working on issues relating to environment and energy economics in the developing world.
Figure 2: The ERC MANANDNATURE grant as a catalyst for work on the economics of environment and ener
Figure 1: Impact of Daily Temperature on Log All-Age Mortality Rates in India and the USA