Institutional Limitations

The evolution of institutions and the human capacities applied to them are major contributing factors to modern economic growth and development.⁶⁶ Modern institutions are adaptive. They can and do adjust to resolve the acute and potential scarcities incurred⁶⁷ as a direct or indirect result of population growth and increased per capita consumption. In particular, competitive markets and supportive government policies promote the structural changes that allow economic activity to increase in scale. Moreover, modern institutions are among the means by which creative solutions and technologies are applied to new problems that population growth and increased density often generate, in concert with other aspects of growth and change.

However, the revisionist institutional thesis--whereby major institutions are seen as valves controlling flows in the economic system--conceives of relationships between institutions and society as mechanical, rather than as the evolutionary processes that they are. The thesis overlooks a large body of social science research that finds even highly evolved institutions to be humanly imperfect. Researchers observe two persistent sources of problems.

First, each institution is limited by its history, its present structure and the circumstances surrounding it. Such institutional limitations‹some temporary, others long-term‹make it difficult to reduce obstacles to economic activity. (These obstacles are known as transaction costs.) Revisionists call attention to some of these intrinsic weaknesses, particularly market failures associated with assets that are common property, particularly where property rights are ill-defined or difficult to uphold. Institutional limitations are more widespread than is generally acknowledged, and institutions are especially limited in their abilities to protect natural assets and long-term human health under conditions of high population density.

The second problem is institutional bias. This is the tendency of institutions to favor some economic actors and some types of assets over others. These economic actors may be larger or more powerful and may exercise control over the institution. Or they may simply have the most direct and immediate stake in the economic processes mediated by the institution. In many ways, institutional bias is beneficial. It tends to reduce transaction costs, promoting activities that facilitate economic adjustment to population growth. But as it does this, bias produces a cost burden on assets and economic actors outside the original transaction. These spillover costs, or negative externalities,⁶⁸ are collateral penalties that are easily overlooked in the course of economic decisions.

Two points made here, and explained more thoroughly below, receive insufficient attention in the economic literature. First, institutional limitations often grow more serious under conditions of high population density. And second, the assets most neglected in institutional transactions, or more damaged by their spillover costs, tend to be those that are inadequately understood, ineffectively conveyed or poorly represented by the institution itself.

INSTITUTIONAL LIMITATIONS

To encourage an economic activity, institutions reduce transaction costs that impede its achievement. For example, it would be excessively expensive for most people to obtain the necessities of life if competitive market systems did not encourage retail outlets and provide financial capital and labor, or if policies did not facilitate communications and transportation networks. But having evolved to solve past problems, institutions such as land tenure agreements, market arrangements and government regulation may now be inadequate, yet remain resistant to change. Institutional performance is also limited by such current events as economic recession, political turmoil or natural disasters. Inadequate technology, weak leadership or a lack of creativity also constrain institutional performance. Classical economist John Stuart Mill concluded that while "governments or nations can in some measure determine what institutions shall be established, they cannot arbitrarily determine how these institutions shall work."69 The pricing of fresh water serves as an example of this.

The market has proved to be a useful means to address freshwater allocation and quality problems. But water resource managers must cross at least three major hurdles to successfully bring this resource into the marketplace: They must establish property rights over watersheds, accurately meter flows and charge equitably for each unit of water. Most attempts to price water, however, run into strong opposition, often fueled by cultural opposition to water pricing or organized by interest groups whose members face substantial costs.⁷⁰ Once they overcome opposition, pricing schemes often falter when faced with impediments to establishing watershed rights, to constructing and maintaining metering networks, or collecting revenues. These transaction costs typically rise with population size and density‹not just within the water consumption area, but as population grows within the catchment area as well.

Numerous urban centers‹many in the developed world, including New York City‹still lack water metering. In the case of New York, whose residents pay flat fees for access to water, suburban development upstream from the city's reservoirs threatens the quality of its drinking water. Because of intense suburban development in watersheds affecting about 10 percent of the city's water, New York has already invested about $600 million in new filtration facilities. To secure its future supply and maintain water quality in the remaining watersheds, the city's government is committed to spending at least $500 million, divided equally for land acquisition and upgrading wastewater treatment in distant communities.⁷¹ New York's situation is not unique. Eventually nearly all growing urban centers will have to protect the naturally vegetated ecosystems that comprise their watersheds, or pay substantial sums to filter water that nature once filtered free of charge.

While advances in public health services are truly remarkable, this institution is still limited in its abilities to protect human health assets. Public health systems have been only marginally effective in controlling the spread and moderating the costs of emerging infectious diseases under contemporary conditions of high human density and physical mobility.⁷² The re-emergence of tuberculosis and the continuing HIV/AIDS pandemic could be ominous precursors of coming technological and institutional challenges. AIDS has already reduced average life expectancies in several sub-Saharan African countries, in Brazil and in Haiti,⁷³ despite continuing increases in life expectancy among those the human immunodeficiency virus has spared.

Demographer Geoffrey McNicoll points out that despite evidence institutional limitations are a growing problem, unrealistic expectations for institutions underlie most recent assessments of the economic impacts of population growth. "A good part of mainstream economics, and an even larger part of standard demography," he notes, "suppose that institutions adapt as required or can be redesigned at will."⁷⁴