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ЗмістTowards sustainable development
What are institutions?
Table 1: Social norms, rules, and organizations for coordinating human behavior
Table 2: Institutions and organizations for coordinating human behavior
Criteria for sustainability and effectiveness of institutions on the way to sustainable development
Table 3: Main basic sustainable development indicators in Ukraine
Institutions for sustainable development
Ekologiya i ekonomika. Regional'naya ekologicheskaya politika.
Transformatsіya іnstitutsіonal'nogo mehanіzmu prirodokoristuvannya v umovah globalіzatsії: ekologіchnі іmperativi ta sistemnі su
Osnovi stіikogo rozvitku: Navchal'nii posіbnik.
Institutions, Organizations And Market Competition.
The Role of Institutions in Economics on the Way to Sustainable Development
Nadiya Kostyuchenko and Dmytro Vikhrov
Nowadays, the problem to count the ecological component in economic development is becoming more urgent. The escalating degradation of the environment is the consequences of overusing the natural resources. The majority of the natural resources used in economic processes are nonrenewable. That means their exhaustion results their disappearance from the Earth.
Exhaustion of a significant part of the natural resources and environmental pollution causes the necessity to search for the most rational forms, methods and ways of environmental management with the purpose to ensure ecologically safe sustainable development. To reach sustainable ecological-economic development, a policy is needed that is different from the one with a technogenic way of thinking. Even more – a holistic ecological-economic approach to economic growth is needed. It is impossible to make a new policy without institutional changes.
Thus the goal of the paper is to try to create a structured and holistic approach to an institutional system on the way to sustainable development.
The author proposes to use sustainable development indicators as criteria for sustainability and effectiveness of institutions on the way to sustainable development. Also the author’s contribution is in making a calculation and estimation of ecological-economic parameters for Ukraine on the basis of OECD and World Bank techniques. The purpose is to demonstrate Ukraine has no sustainability in its development for the time being and thus the country needs some changes and reforms in the institutional environment. The author proposes some parameters that will indicate the best institutional changes for Ukraine. It is shown in the paper that there is a problem in understanding the term “institutions”. The author agrees with well-known scientist Douglas North that organizations are not part of institutions. Also the author’s contribution is in trying to generate a so-called institutional mechanism on a way to sustainable development.
The role of institutions in Economics on the way to ecological-economic sustainable development is shown in the article.
The concept of sustainable development was adopted in 1992 during the United Nations Conference on Environment and Development in Rio de Janeiro. Today the concept of sustainable ecological-economic development has grown into a very popular concept.
Sustainable development (SD) is such a development of a society when the satisfaction of the modern generation’s needs (requirements) does not place under threat the opportunity of future generations to satisfy their needs (requirements) [Report 1992; Melnik 2005]. In other words, this is an economic development in the view of ecological restrictions because of the nonrenewable character of many natural resources used in economic activities, and environmental contamination during the activity.
As to the idea of validity between generations, so-called intergeneration sustainable development, it is possible to say that the modern generation, with the help of today's rash actions, tramples on the opportunities of the future generations to use these resources for development. And modern technogenic development, when the main purpose is to get profit, causes intergeneration externalities (external costs) such as environmental contamination. Therefore, future generations will be compelled to carry additional expenses for liquidation of these consequences.
Ukraine, among other countries, has signed the international document called “Agenda XXI” in which the main idea is transition to a sustainable development. Many countries (both developed and developing ones) have expressed readiness to follow it.
It is impossible to make a new policy without institutional changes. Introduction of new branches and modernization of old ones into an existing construction of environmental management requires scale changes in institutional environment. Holistic institutional changes which would speed up the processes of social and economic growth in terms of natural resources’ limitation are necessary. It is also a necessity to settle sharp environmental problems. These changes should be such that it would also form a new institutional mechanism on the way to sustainable development.
Institutions are clusters of rights, rules, and decision-making procedures that give rise to social practices, assign roles to participants in these practices, and govern interactions among occupants of those roles.
Institutions are composed of formal rules, informal constraints, and the enforcement characteristics of both [North 1990; North 2006]. On the formal end, they include a country’s codified rules and laws, and the procedures and organizations for making, modifying, interpreting, and enforcing the rules and laws. On the informal end, they go from trust and other forms of social capital (including deeply rooted norms governing social behavior such as customs, traditions) to informal mechanisms and networks for coordination (see table 1) [World 2003].
Unlike organizations, which are material entities that typically figure as actors in social practices, institutions may be thought of as the rules of the game that determine the character of these practices or more formally are the constraints devised by humans that facilitate coordination of human action. Organizations, too, specify the constraints that structure human interaction inside the organization but in addition they are action groups [North 1990].
Source: [World 2003].
Here it is necessary to mention that organizations are not institutions as institutions are the “game rules” and organizations are the actors of the game. That is why some changes in figure 1 have to be made. The institutions mentioned have to be divided into institutions and organizations. That means organizations have to be excluded from the institutions. A part of the social capital (trust, norms and shared values) has to be included into the institutions (see table 2).
Source: Made by the author on the base of [World 2003] & [North 1990].
Indicators of sustainable ecological-economic development can act as a basis for revealing sustainability in the development of the country. They can also act as a motivation of necessity for institutional changes on the way to sustainable development. Also such indicators can be used as criteria for the effectiveness of institutional changes on the way to sustainability.
A policy is said to be effective if it solves the problem it was supposed to. Thus the notion of effectiveness is closest to what would be the most likely focus of environmental activists and environmentally concerned citizens. Effective policies are those that clean the air, restore lakes and save species from extinction. The question of effectiveness does not take into account any other social problems that may arise as a result of their implementation [Folmer, Gabel & Opschoor 1995]. As for the institutions on the way to sustainable development, effectiveness criteria mean that these institutions help to reach sustainability.
In the very near future, it is possible that there in Ukraine a quite real situation could exist when formal economic growth (growth of gross national product, etc.) will be accompanied by the further ecological degradation if no requirements and recommendations on the way to sustainable development are kept. Therefore it is necessary to make correction of the basic economic parameters in view of the influence on the environment. The standard economic indicators do not reflect ecological degradation. Their growth can mean damage of natural resources and the growth of environmental pollution. Thus, the system of indicators that would display economic and environmental changes is necessary for an estimation of development tendencies in the country.
The system should include a somewhat brief list of indicators so that it would be accessible to the review of them. Such indicators have to characterize completely basic problems of sustainable development in the country. And they also have to correspond to international requirements [Bobylev & Medvedeva 2003].
However indicators should show the real situation in the country. Here it is important to understand that it is impossible just to transfer parameters of one country’s technique to another. A careful analysis of national realities and peculiarities should be followed by the use of the foreign experience and methodology in the construction of sustainable development indicators [Bobylev & Medvedeva 2003; Danіlіshina & Lіbanova 1997].
Having the integrated ecological-economic indicator at the macro level is ideal for the decision-makers, because such an indicator takes into account environmental factors in the development of the country. Investigating such a parameter it would be possible to draw a conclusion concerning the extent of sustainability in the country. That means such an indicator can be an original analogue of gross domestic product (GDP), and national income that is today the measurement of economic development success and economic well-being. However there is still no generally accepted integrated indicator in the world because of the methodological and statistical problems, and complexity of calculation [Bobylev & Medvedeva 2003]. For example, it could be GDP correlated to environmental damage made during the year. But there is also another problem with estimating environmental damage. That is why many different approaches for estimating different sustainable development parameters are used.
According to the calculation and analysis made by the author for Ukraine on the basis of OECD, World Bank and UN techniques concerning ecological-economic indicators, one can draw the conclusion that Ukraine has not yet reached sustainability. Though the main indicators obtained during research have positive results, they do not meet the requirements of sustainable development (see table 3). It is necessary to realize that the results will reflect the level of stability if only harmless, innovative, material- and energy-saving technologies are used. It will result in less waste and pollution. The results obtained for Ukraine were caused by economic crisis and lowering of production.
That is why just considering the trend of basic ecological-economic indicators on the basis of international techniques, we can come to the wrong conclusion that Ukraine is in a rather favorable situation on the way to sustainable development.
However, some indicators quite adequately show the condition of the economy and environment in Ukraine. Among them it is necessary to single out the area of especially protected natural objects, coefficient of capital fund renewal, the index of the consumer prices, etc. The values of the two last indicators confirm once again that the results received are caused first of all by the fall of production during the long economic crisis in our country. Besides, the growth of GDP is greatly caused by the trade.
^ [calculated by the author on the base of statistic data: Statistichnii 2002; Statistichnii 2004].
Making the analysis of basic problems and sustainable development indicators in Ukraine (more then 20 parameters), you can get a more realistic picture but with overestimated results as well.
According to the analysis made above one can state that the country has the necessary information for estimating not only economic but also environmental parameters. And now it is possible to select the main indicators that can be used as criteria for the sustainability and effectiveness of institutions in Ukraine on the way to sustainable development. Among such parameters we can include:
These are mostly economic indicators, but they show the real situation in the country. This point is important as one can see a positive tendency like reducing pollution but the reason for that can be a reduction in production and not resource-savings or filtration technologies. Sustainable development is economic growth but with respect to environment.
One can draw a conclusion nowadays that there is no sustainability in the development of the Ukraine in spite of some positive results of the indicators. Thus, institutional changes are needed in Ukraine as it proceeds in its journey to sustainable development; this is because the structure of the national economy does not meet the new requirements of economic transformations on the way to sustainability. Such institutional changes that would provide social and economic growth in terms of limited natural resources and would promote solving sharp environmental problems are necessary.
Institutions that exist these days do not carry out their basic functions. They do not provide fair game rules between the basic agents of economic relations on the way to sustainable development. The special urgency of this problem is caused by the strategic importance and value of the natural resources as the basis for favorable life conditions [Gerasimchuk & other 2006]. That is the reason why interest to institutional theory grows.
As was mentioned above, institutions are a complex combination of official and informal (nonofficial) limits. They define the way in which society develops over time. Thus, if the country is in the process of heading toward sustainable development, institutional changes are necessary because the transformation of institutions takes place while undertaking reforms.
From the point of view of environmental themes, institutions are the "game rules" that delimit access to natural resources. These are formal and informal restrictions of natural resources’ consumption by individuals and by determined groups of the population. From the economic point of view, it is possible to understand institutions as access to natural resources, the right to get income from them, and also the obligation to carry out payments for using these resources. In this case, natural resources act as a part of the distributed income and the right to get profit [Sergienko 2004].
Problems that require lasting solutions are often not susceptible to quick fixes. And solving environmental problems is a long run process. Such problems require the coordination of many actors. Inclusion in the form of voice and access to assets facilitates coordination: more inclusive process lead to more sustainable outcomes; voices and wider ownership of assets lead to more inclusive processes.
Effective coordination requires institutions that undertake the following functions:
Such institutions are often lacking or are flawed, when some interests are dispersed or when some groups in society are poor or in other ways disenfranchised. Groups that lack assets tend also to lack voice, security, and a stake in the larger society, hampering institutions’ ability to perform needed coordination functions. The result is a vicious cycle, which institutions implement policies that lead to an increase in polarization and unequal asset distributions (see figure 1) [World 2003].
Figure 1: “Policy-institutions-assets” loop
From the point of sustainable development these assets are, first of all, limited natural resources.
Certain mechanisms for promoting transparency, feedback, accountability, commitment, and negotiation of interests do not change institutions overnight but help to build momentum for lasting change. Over the long run period, fostering inclusiveness is essential.
What are the barriers to the emergence of such an institutional environment? One is dispersed interest. There are externalities: the actions of one person may impose environmental costs (such as pollution) and social costs (diminished trust in institutions) on other people – costs that the responsible party doe not bear. Free riders have no incentive to contribute to the maintenance of public goods from which they cannot be excluded. The solution to these problems is the policy that aligns individual and social incentives, either through positive or negative motivation (taxes, subsidies, and regulation), or through the deliberate creation of new market mechanisms.
A second barrier is the difficulty of forging credible commitments to protect and nurture persons and assets. And a third is institutions that are not inclusive [World 2003].
The actors in society partly play under a given set of rules and they partly shape those rules. Firms, the government, and civil society are positioned to act and to influence the actions of others, playing complementary roles in coordination.
In many areas, government plays a central role in organizing dispersed interests. Unlike social norms and values, the government operates a rulemaking process by which rules can be changed more quickly, with vision and design, and still be forceful. However, if a government - with its socially sanctioned coercive powers – finds itself unbound by rules it can’t commit itself as a partner. And unless institutions succeed in separating the powers of government and providing meaningful checks and balances, communities and the private sector will be less forward looking, and environmental and natural assets will be hurt through inappropriate investment and conservation.
A major challenge for the government and formal institutions is to be more welcoming and supportive of private actors with appropriate safeguards to ensure that public interest is not compromised.
Civil society organizations can take initiative and provide voice for unheard interests – building the trust, legitimacy, and knowledge needed.
In the broader institutional environment, firms, the government, and civil society organizations together give force to rules and norms (see figure 2). For instance, civil society can help keep the judiciary independent. Indeed, rules and norms are typically backed by sanctions, and many are effective only when agencies and organizations back them up.
Proposals from public authority and feedback as results of economic development can be taken as signals on the way to sustainable development. The balancing of interests takes place at many levels: in the national legislature, in the court process, in marketplaces, in individual norms and village interactions as well as within the seen or unseen processes in corporate boardrooms and branches. It is possible to impose an emission standard or a tax, or strengthen enforcement. Implementation of solutions can be provided through fiscal regulation (taxes, penalties, tariffs, dues).
The problem is to find the optimal institutions that will make sustainable development in the country real. It is a problem because in different countries, different institutions work better. In one country, the positive motivation of the changing processes for sustainability may be efficient. In another one, it is possible to get the result only while using negative motivation.
Figure 2: The role of institutions in Economics
Informal institutions Formal institutions
Environmental education (constitution; different laws)
Ecological-oriented way of thinking
(taxes, penalties, tariffs, dues)
(Process of study)
Source: Made by the author on the base of [Valevich 2002].
There should be, first of all, changes in official restrictions. In this instance the role of the government will grow. The main purpose should be introduction of resource-saving technologies. Various sanctions and penalties for environmental pollution, payments for natural resources’ use, the account of an ecological component in pricing, etc. can act as tools for providing sustainability. Positive motivations can be used as instruments (such as grants, bonuses, preferential taxation, crediting under the reduced rates) if the person uses saving technologies, follows the nature protection legislation etc. in his economic activity.
Change of informal limits is a more complex and long-term process, which demands forming of corresponding environmental open space and way of thinking due to environmental education and ecologization of all spheres in life.
As Ukrainians are not ready yet to follow the principles of sustainable development, an increased role of the government is needed; first of all, this relates to dues and penalties for environmental damage and high tariffs for using natural resources. These will be a source of negative motivation for sustainable development. Among the positive motivation, we can include soft taxation for providing saving technologies and filtration facilities. There also has to be an increased role of government in the acceptance of different ecologically oriented laws. However, there also has to be an increased role of the public authority to make them able to participate in the decision-making process in order to correct and adopt the laws to environmental needs.
Transition to sustainable development requires forming of the ecologically oriented way of thinking and way of life; it also requires institutional changes, which the deep analysis of public, economic and ecological intercommunications must precede. Environmental education and ecologization of economics - and as a result development of environmental thinking, change of consciousness and of the way of life - have to be the basis for institutional changes on the way to sustainable development.
Institutions are the "game rules" which delimit access to resources. Thus, on the way to sustainable development there should be formal and informal restrictions of resources’ consumption, directed on their preservation and reasonable use with the purpose of economic growth in terms of environmental protection.
Until institutions attain success in the division of power and in giving a part of the power to public authorities, environmental and natural resources will carry damage and there will be further facilitation of environmental crisis. Indicators of sustainable development will allow the analysis of whether or not institutional changes were positive on the route to sustainable ecological-economic development.
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