ANALYSISInformal regulation of pollution in a developing country: Evidence from India
Introduction
The design of policy instruments for industrial pollution is not only complex but also very daunting in the case of developing countries. In principle, the regulator has an array of physical, legal, monetary, and other instruments at his/her disposal (Sterner, 2002). But the presence of a large number of pollution sources in the form of small-scale industries (SSIs) that lack knowledge, funds, technology and skills to treat their effluent frustrates any instrument applied and leads to overall failure. The failure of industrial pollution control is also attributable to rigid command-and-control regulatory approaches. Regulators are constrained by meagre resources, limited authority and political interference. These problems are compounded by information asymmetries. For all these reasons, numerous studies in India have concluded that despite a strong legal framework and the existence of a large bureaucracy to manage environmental regulation, implementation is very weak (see, for example, Pargal et al., 1997a, Murty and Prasad, 1999, among others).
The failure of formal regulation to control pollution has highlighted the significance of informal regulation for achieving environmental goals (see, for example, Pargal and Wheeler, 1996, Afsah et al., 1996, Pargal et al., 1997a, Tietenberg, 1998, Wheeler, 2000, Sterner, 2002, among others). There is now considerable interest in “information disclosure” and “rating” as potential tools of industrial pollution control. Sometimes referred to as the “third wave” of environmental policy (Tietenberg, 1998), this approach acknowledges the difficulties of monitoring and enforcement and recognises that there are many more avenues of influence than just formal regulation or fines. Firms are sensitive, for example, about their reputation and the future costs that they may incur as a result of liability or accidents. The emergence of this new paradigm for regulation is also related to advances made in our understanding of asymmetric information (Kathuria and Sterner, 2006).
Anecdotal evidence suggests that when formal regulation is weak or non-existent, informal regulation through local community participation has forced the polluter, especially “visible” ones, to take corrective action. For instance, in 1980, at Banjaran near Jakarta, local farmers burnt a government-owned chemical factory that had been polluting their irrigation channels (Cribb, 1990, referred in Wheeler et al., 2000). Similarly, a paper mill in India, after community complaints, had to install pollution abatement equipment and construct a temple as compensation for damage to the community (Agarwal et al., 1982). Khator (1991, referred in Hettige et al., 1996) using several case studies illustrates how polluting plants in India have responded to community pressure.
Pargal et al. (1997b) suggest that informal regulation can take varied forms, including demands for compensation by community groups, social ostracism of the polluting firm's employees, the threat of physical violence, and efforts to monitor and publicise the firm's emissions/discharges. Two “formal” channels of informal regulation are (i) reporting violations of standards to the regulatory agencies (where such standards and institutions exist); and (ii) putting pressure on regulators (through politicians and administrators) to tighten monitoring and enforcement. However, there also exist channels of “informal” regulation, such as public disclosure, ratings, etc., where markets are used to punish polluters. In fact, public disclosures and ratings work when the industrial units are not only relatively large but also in the organised sector and depend on outside markets for their products, finances, etc. However, since a large number of industrial units in India and the rest of the developing world fall under the unorganised sector, the effectiveness of formal channels of informal regulation and public disclosures is limited.
In India, 3.2 million small-scale industries (SSIs) produce about 8500 products and some of these products are highly polluting. Even a conservative estimate of 10% of the total SSIs as being polluting in nature implies that there are 0.32 million industrial units causing an adverse impact on the environment (CPCB, 2001: 2). The net impact of these units is estimated to be nearly on par with all the large and medium industries put together. SSIs contribute approximately 40% of wastewater generated (among 11 industries, where SSIs have a sizeable presence) (CPCB, 2001: 4). In such a context, the informal pressure has to be highly localised. A proactive vernacular (or local) media is one such localised means of informal regulation. This particular informal channel for regulation is the focus of the present paper.
The paper investigates whether the press has any role to play in pollution control in the second most industrialised and highly polluted state of India, i.e., Gujarat. To answer this question, monthly water pollution data from four water-quality monitoring stations of Gujarat for the period Jan-96 to Dec-2000 is used. The main findings of the paper are that informal regulation, as measured by the number of articles in the vernacular and national press, along with public interest litigation decisions, has worked partly to regulate pollution. Results show that sustained pressure from the press leads to a fall in pollution. However, not all stations are affected equally. It is mainly the monitoring station that receives water from an industrial estate (IE)1 housing multi-size industrial units that appears to respond to informal pressure. The analysis also reveals that formal regulation, as denoted by the staff allocated to a region, does not have any impact on industrial pollution generation behaviour.
There are several important reasons for the response of industries to this informal regulation (i.e., the vernacular pressure): (a) a threat of increased intensity of formal regulation with more inspections, penalties and imprisonment as result of more press coverage of industrial pollution; and/or b) a threat of more court cases by the local communities.2
The remaining paper is organised as follows. Section 2 summarises the literature on informal regulation in India and elsewhere in the world. Section 3 gives the economics of pollution in a region and how formal and informal regulation facilitates the alignment of behaviour of polluters with that of society. A simple econometric model that looks into the role of informal regulation in controlling pollution is formulated in Section 4. The data and variables are given in 5 Data and variables, 6 Results reports the results. The paper concludes with some policy implications in Section 7.
Section snippets
Environmental news, informal regulation and firm behaviour: a review of the literature
Most studies conducted in the developed countries have focused on how capital markets respond to the announcement of adverse environmental incidents (such as violation of permits, spills, court actions, complaints) or positively to the announcement of superior environmental performance. Hamilton (1995) and Konar and Cohen (1997), for example, discuss the reaction of markets to releases of the Toxics Release Inventory. Lanoie and Lapante (1994) and Lanoie et al. (1998) have tried to identify the
The economics of pollution — with formal and informal regulation3
The previous literature investigating the impact of informal regulation has looked at “equilibrium pollution” levels in regions that are bereft of any formal regulation (see, for example, Pargal and Wheeler, 1996, Hartman et al., 1997, among others). This may be true for a few developing countries but not for all. Even in India, where regulation failure cases abound, pockets exist where formal regulation has worked. Regulation-induced use of Compressed Natural Gas (CNG) leading to a fall in air
Model specification
The model used here is an extension of the one used by Pargal and Wheeler (1996). Pargal and Wheeler used the model to estimate the firm's equilibrium pollution. The present study modifies the Pargal and Wheeler model to incorporate the effect of formal and informal regulations in order to arrive at pollution level at the region instead of at the firm level. Pargal and Wheeler estimated the firm's equilibrium pollution as an intersection of the demand for environmental services by the firm and
Pollution data and selection of estates/monitoring stations
In Gujarat, monitoring of surface water is done through 39 stations — 7 of which come under the Global Environmental Monitoring System (GEMS) on 4 major rivers, and 32 stations are under the Monitoring of Indian National Aquatic Resources System (MINARS), which are on both major and minor rivers, creeks, etc.9
Basic pooled model
Table 4 gives the results for the pooled model. Column 1 of the table gives results when neither year nor month dummies is included in the model. Columns 2 and 3 report the results with the inclusion of month and year dummies. Since any increased coverage by the vernacular or other media should spur local monitoring, an interaction term (between informal regulation and the formal regulation variable) is included with the results given in Column 4.
As expected, the rains dilute the pollution
Concluding remarks
The design of policy instruments for monitoring industrial pollution in the case of developing countries is a challenging task. In principle, the regulator has an array of physical, legal, monetary, and other instruments. But the presence of a large number of SSIs and informal sector pollution sources that lack knowledge, funds, technology and skills to treat their effluent, makes a mockery of any instrument applied and leads to overall failure. The literature in the recent past has not only
Acknowledgements
This Paper is part of a project titled “Industrial Pollution Control: Choosing the Right Option” awarded by the South Asian Network for Development and Environmental Economics (SANDEE) against the grant SANDEE/Sept. 2000/04. We acknowledge with thanks the grant and other support received from SANDEE. Earlier versions of the paper were presented at the 12th European Association of Environmental and Resource Economists (EAERE) Conference held at Bilbao, Spain, from June 28th to 30th, 2003, and
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