Monday, August 15, 2005

Cross-Border Pollution in Asia: Can Coase Tame a Brown Cloud?

The New York Times on 8/16/2005 discusses the export of smoke from Indonesia to Malaysia. If property rights are well defined and transaction costs are low, does the Coase theorem apply here?

"Smoke from burning jungles in Indonesia spread across wider portions of Southeast Asia on Monday, as firefighters from Malaysia moved in to help combat the string of blazes that are testing relations between the neighbors. An acrid haze covered some Indonesian cities and drifted up the northern coast of Borneo and north along the Malay Peninsula into Thailand, where officials issued health warnings. Satellite imagery showed the greatest concentration of visible fires to be in the western part of Kalimantan Province, in the Indonesian part of Borneo, spewing the haze that has become an annual scourge for the region as poor farmers, illegal loggers and plantation companies in Indonesia set hundreds of fires to clear land. Last week, the fires forced Malaysia to declare a state of emergency in two coastal cities as haze levels there reached record highs. Low visibility and pollution forced officials to close schools and shut down Malaysia's busiest port for a day." (article by Wayne Arnold titled Indonesia's Yearly Smoke Cloud Reaches Malaysia and Thailand)

At the end of the article, the New York Times actually argues that economic
development could mitigate this externality! "Malaysia's team of 125 firefighters arrived Monday in the capital of Indonesia's Riau Province, Pekanbaru, a city best known as a base for oil companies like Chevron that operate in the petroleum-rich province. Provincial authorities have long complained that too little of the oil being pumped out of Riau was benefiting its own people, doing little to alleviate the poverty that contributes to the haze problem. Poor farmers, lacking modern machinery, still rely on slash-and-burn techniques to clear new land for farming."

If the poor farmers had greater access to modern capital, they would not engage in destructive activities that exacerbate air pollution problems downwind. This raises the question; "Why don't the Malaysians provide this "green" equipment for the poor Indonesian farmers?" While this "gift" would be costly, it would seem to beat
the alternative of importing all of this soot. This strikes me as a Coasian
resolution to the externality.

The interesting economics here is that Indonesian economic development could mitigate the cross-boundary externality! In other regional public goods settings the opposite takes place. Consider increased Mexican growth in its Maquiladoras zone affecting U.S environmental quality. In this case, growth is "bad" for the neighbor's environmental quality.

While the New York Times does a nice job outlining this Indonesian case it provides
little insights concerning the bigger issue of how to mitigate cross-boundary
externalities. Hilary Sigman has examined whether nations who trade more are
more likely to resolve cross-boundary water pollution problems than nations who trade little. This paper is available at in the pollution havens special issue.

For non-economists who are reading this, Ronald Coase won the Nobel Prize. --- part of his contribution to economics was his analysis of how to mitigate the social costs of externalities.
In all honesty, the Coase theorem is not applicable in this case. Property rights
are not well defined and transaction costs are high. In english, it is difficult
for the victims from the smoke to locate and bargain with Indonesia's farmers.

You may have noticed that I have assumed that Indonesia has the "property right"
to pollute on its neighbor. If Malaysia had the right not to be polluted on
then it clearly would have enforced this right already. In the absence of an
International Law enforcer, Malaysia will need to take pro-active actions
to provide Indonesia both with incentives and resources to mitigate this problem.