5.3 Land and other natural resources
The institutions that affect the use of land and other natural resources most are those that define property rights over these assets. Property rights determine the access to and use of resources that can be made by individuals or groups. This includes specification of how they may transfer the property rights to others.
The nature of the property rights related to a particular resource depend on whether people can be excluded from using the resource (excludability) and the number of people that can use the resource concurrently (rivalness). Property rights can be broadly categorised as private property (generally excludable and rival); common property (group members have the right to exclude non-members); public property (owned by all, but with access and use controlled by the state); and open access property (where no one has the right to exclude anyone).
Open access property is typically inefficiently over-exploited; a problem termed by Hardin (1968) the “tragedy of the commons”. Without any institutional constraints, a negative appropriation externality arises where an individual uses the resource ignores the impact on the resource and on others. The result is a “rush” as individuals compete to appropriate the resource before anyone else does. Institutional responses to the overexploitation problem include the development of rules to regulate the capture of the resource stock, such as first-come first-served rules to minerals, and rules to regulate the capture of flow, such as riparian rights to water, estover (pasture) turbary (peat) and piscary (fish). The development of the Individual Transferable Quota (ITQ) based management systems for fish in New Zealand is a response to an overexploitation system common in fisheries (Newell, Sanchirico and Kerr 2002).
Common property institutions typically include rules that prescribe who may use and benefit from the resource and what use may be made of the resource. Alienability is typically limited. Examples include village grazing areas, tribal fishing areas. In New Zealand, many of the resources owned collectively by Maori have common property characteristics. Common property institutions can lead to efficient resource use in some circumstances, generally where there are economies of scale in resource use; there are low transaction costs in monitoring and enforcement and the economic and social environment is stable (Ostrom 1990).
However, common property can also result in inefficient use (Cheung 1970). There is the possibility of opportunistic behaviour by individuals who might, for example sell the resource without the consent or knowledge of the other common owners. Common ownership increases the transaction costs of obtaining agreement among owners eg, for use or alienation; dilutes the incentives for any individual to husband or invest in the resource (others will benefit); discourages uses that may be more valuable but where monitoring of inputs and outputs is more difficult; reduces the ability to use the resource efficiently eg, to aggregate resources and increases fragmentation of title among successors (exacerbating the problem). Common ownership also reduces the ability to use the resource as security ie, it increases borrowing costs (Anderson and Lueck 1992). De Soto (2001) considers that a lack of formal institutions of private property that prevents natural and physical capital from being used efficiently is responsible for the lack of economic development in many countries of the world.
In general, private property rights can be expected to result in efficient and sustainable resource use, since owners enjoy both the costs and benefits of their resource use decisions. The maximum economic value can thus be drawn from resources when private property rights are clear and well-defined.
However, private property rights may conflict with the rights of others. Pollution is the classic example of a resource allocation problem that arises because property rights are poorly defined. For example, air pollution arises because there are no clear defined property rights to air. Cars and factories can therefore emit smoke at no cost to themselves without regard to the impact on others.
Creating clearly defined property rights is a “first best” solution to the problem of externalities (Coase 1960). Alternatives include taxation and regulation. Private property rights are thus typically limited in some respect, often by regulation that proscribes use. The proscription may be intended to limit or prevent externalities that negatively affect others. While such regulation may be imposed with the objective of fostering the efficient use of resources, they can in some cases lead to inefficient resource use. Heller’s (1998) notion of anti-commons describes resources for which multiple parties have the right to prevent use or prevent changes in use. The result is the “tragedy of the anti-commons” where the fragmentation of veto rights creates incentives to hold-out and raises the transaction costs of agreement about efficient resource use.
Property rights legislation will contribute most to economic growth where it facilitates the use of land and natural resources by those who can use the resources most productively. Ideally, institutions will ensure that long term considerations of sustainability are taken into account when determining property rights over resources. Generally, those that value resources most are those that can obtain the greatest economic value from them. Non-economic factors (eg, cultural and spiritual values) play an important role in the use of land and other natural resources, but in order for efficient resource decisions to be made, those who enjoy the non-economic aspects of resources should also bear the costs.
5.3.1 Resource allocation, innovation and human capital
The quality of property rights around land and natural resources will affect the level of investment in such assets. Effective property rights institutions provide clear guidance on what property rights are, how to obtain them and the costs of ignoring them. Effective property rights institutions decrease the cost of sourcing finance for investments in land and natural resources as they decrease the uncertainty around the returns of the investment. Clearly defined property rights improve certainty about the returns from investment and so improve the value of investing in these resources. They can also reduce the cost of investing, by minimising the cost of obtaining property rights and reducing the legal costs incurred in gaining certainty about the validity of property rights. Clear property rights therefore improve the ability of firms to expand their productive capacity through innovative use of land and natural resources.
The effect that this has on investment in human and physical capital is uncertain. Unclear property rights could see firms substitute investment in human or physical capital for investment in land or natural resources. However, where firms have clear property rights over land, they are likely to also make investments in human and physical capital to complement their investments in land. In general, a firm’s overall productivity is likely to be reduced where the quality of its investments in one factor is compromised and it is not able to make full use of all its resources.
5.3.2 New Zealand natural resource institutions
The key piece of legislation related to the use of land and natural resources in New Zealand is the Resource Management Act 1991 (RMA). The purpose of the RMA as specified within the Act is to promote use of natural and physical resources for social, economic and cultural wellbeing in a manner that sustains the potential of these resources to meet the reasonably foreseeable needs of future generations. The RMA governs the use of land (including building on land), water, soil and air.
Business groups have expressed a number of concerns about the RMA and its impact on potential productivity. They are concerned that the process involved in obtaining resource consents under the RMA can be expensive and uncertain in terms of the decisions that will be reached about applications and the time involved in processing applications. They suggest that it is also a barrier to infrastructure developments that are essential to business, e.g., power generation and transmission, roading and water use. The government is undertaking a review of the RMA to be completed in September 2004, considering how to achieve the right balance of national and local interests, improve the design and process for local policy formulation, improve the consent decision making process, improve mechanisms for deciding who can use natural resources and support measures for building capacity and promoting best practice and implementation in local authorities.
A different resource management issue arises from the collective ownership structure of Maori land and whether it achieves a balance between protecting land from alienation and enabling land to be managed as a commodity for sustainable economic development (New Zealand Treasury 2001). Change to institutions in this area, particularly mechanisms for achieving control and financing, could allow greater returns to Maori land owners.
New Zealand’s environmental laws are ranked very poorly in terms of their impact on competitiveness by IMD International (2004). New Zealand is ranked 60th out of 60 countries in terms of whether the compliance requirements of environmental laws hinder competitiveness. At the same time, New Zealand is ranked 11th in assessments of whether pollution problems that affect the economy (ie, the impacts of pollution are low compared to those of many other countries). The rankings in the Yearbook are based on survey responses rather than actual costs, so they reflect the perceptions of local business people rather than the relative level of costs associated with environmental laws in New Zealand relative to those in other countries.
