Choosing The Right Mix: Market, State, and Institutions for Environmentally Sustainable Industrial Growth

Efficiency, Growth and Exports are the main items on nation’s economic agenda. There is some concern (perhaps not adequate) for developing Safety Nets for people hurt/left out by growth. Unfortunately environmental implications of industrial restructuring have not been given adequate attention. We present a framework to identify the appropriate policy response to make growth environmentally sustainable. We see no contradiction between growth and environment sustainability. There is a broad degree of consensus that the size of the cake needs to be expanded. The issue therefore is not to have growth or not. The issue is what kind of growth and what pace of growth. Environmental implications are contingent on the pace and kind of growth. Since environment sustainability and economic growth reinforce each other, we need to make environment as an explicit decision variable in the macro economic policy. Three policy measures i.e. market mechanism, state intervention, and institutional innovations can be used to enable firms to internalize externalities. We need to identify various mix of three options to deal with various kinds of externalities. The best policy response is one that internalize at lowest transaction cost. In Section one we present a typology of externalities. In Section two we relate the type of externality with the stage and causes of industrial growth. Externalities can rise not only at the firm stage (input and transformation) but also at the consumer stage (consumption and disposal). Growth at production can be due to increase in scale of operation, new technology, and increase in number of firms. Growth in consumption can be due to increase in per capital consumption, introduction of new products and new consumers entering the market. In Section Three we speculate upon the feasible policy choice given a mix of externalities, associated uncertainties and the measurability of the impact of the uncertainties.