3 Institutions and sustainable development
In Sharp (2001), sustainable development was shown to encompass four categories of capital, concern for intergenerational equity and the explicit recognition of total economic value. The instruments discussed in Section 2 provide a basis for the formation of policies for sustainable development. Understanding the mapping of policy instruments (MBIs and CAC) into economic and environmental outcomes is crucial to providing a foundation for sustainable development. Policy instruments belong to the set of institutions that exist within New Zealand society. The set of institutions (S) refers to the laws, rules, and restrictions that directly and indirectly constrain the opportunity sets and influence the decisions of individuals within society. Institutional structure includes all the formal and informal rules that provide opportunities for economic growth including rules that work to influence the actions of people where externalities are involved. For example, rules governing the use of water sit alongside rules protecting environmental interests. Property rights associated with water use combine with laws and rules governing the formation of irrigation companies, contracts governing the supply of inputs to and outputs from agricultural firms.
This section is aimed at providing a basis for assessing the quality of institutional arrangements and decision-making structures within the framework of sustainable development. At a conceptual level, we have the following relationship:
Q = f(P,S,R)
where:
Q = set of sustainable development indicators;
R = resource endowment;
P = preferences of people, objectives of firms and agencies; and,
S = institutional structure.
In the context of sustainable development, we are interested in the relationship between indicators of sustainable development Q and the variables R, S and P. For example, qw ∈ Q might represent the flow of economic benefits associated with water allocation (use and nonuse) (R), regional water allocation rules (S) and the preferences of individuals and firms (P).
3.1 Institutions and sustainable development policy
Institutions provide a fundamental link between sustainable development policy and public sector organisations, commercial organisations, communities and individuals. Looking at the Resource Management Act we see that its purpose is to promote the sustainable management of natural and physical resources. This is not to say that parliament-made rules are primal source of society’s institutional framework.
Kasper and Streit (1998) distinguish between external and internal institutions. External institutions are imposed on society by political action. External institutions can be procedural rules that instruct agents of government on process, consultation, and so on. Because they are prescriptive, external institutions place a high requirement on information and knowledge. For example, water pollution might be governed by rules that instruct public sector officials to set standards at a predetermined level. Officials then set limits on discharges that are considered to bring about the predetermined outcome. External institutions can also provide a platform for decentralised decision-making. For example, New Zealand’s quota management system is an external institution that provides the basis for the trade of rights to harvest fish.
Internal institutions evolve within a group or community as a result of experience. For example, quota owner associations are internal institutional arrangements that evolved as a result of a group forming to protect and enhance the value of quota rights.
Philosophers such as John Locke and Friedrich Hayek emphasised that the structure of politically determined institutions (external) had to rest on internal institutions such as conventions about behaviour, custom and manners. External institutions are designed and imposed on a community by government with the political power to coerce. Institutions constrain opportunistic behaviour and carry sanctions for breaches of the rules (North, 1990; Ostrom 1990). External institutions imply a degree of hierarchy, formal sanctions exist for violating the rules (eg, a firm caught violating the conditions of its discharge permit) and are often backed-up by a third-party (eg, civil law).
At the most fundamental level, institutions can be thought of as rules that apply to the community. In a narrow sense, institutions provide a set of rules that govern market exchange, the supply of services from government and the distribution of goods and services in the economy (Davis and North, 1971). These rules can be the product of parliament (eg, Resource Management Act) and regional government (eg, pollution regulations in a Regional Plan), the Environment Court (eg, a ruling on best management practices), company-specific rules (eg, a stock enhancement company’s rules on quota violations), rules set by government to guide the management of a community resource (eg, coastal care groups), and so on.
In the context of sustainable development some of the major reasons given in the literature as to why governments become involved in designing and imposing institutions include the so-called “tragedy of the commons”, which arise because of ill-defined property rights; attempts to overcome the problem of free riding assets that have indivisible costs or benefits, where exclusion is difficult; and, the provision of a basis for people to make credible contractual commitments that can be enforced by third parties.
In most modern economies, significant resources are used to coordinate the activities of individuals, firms and units of government. According to Arrow (1969) coordination costs are simply the costs of running the economic system. Figure 8 illustrates the costs of owning and using property.
The above distinction (external/internal) is useful if we link the external rules (which are controllable to varying degrees by policy makers) to observable sustainable development outcomes. For example, in principle it should be possible to link regional rules governing land development with economic benefit – net of development costs, opportunity costs, external costs and compliance costs. In addition, external institutions also provide an opportunity for innovation and wealth creation by providing a basis for the development of new, possibly internal, institutions and unleash a dynamic that fosters sustainable development.
