On November 11th 2014, Israel Finkelshtain, Lab Fellow and Professor of Agricultural Economics at Hebrew University of Jerusalem, presented his current research project on environmental resource control in the presence of political influence. The seminar was divided into three segments, in which he discussed an economic model of campaign contributions and lobbying, the implications of this model for environmental policies, and finally his empirical research on the Israeli water economy.
Finkelshtain began the seminar by comparing indirect and direct regulation, the two different control forms used by the government. Indirect regulation involves the use of taxes, user charges, levies, and fines, while direct quantitative controls directly cap the amount of a resource that can be used through quotas, standards, and bans. In economics, it is generally thought that if the government is “benevolent,” both forms of regulation will yield the same resource allocation and social welfare level. This means that neither indirect control, direct control nor some combination of the two should be more or less effective. This does not hold true, however, when the government is susceptible to political pressure from lobbying. Finkelshtain’s research is to figure out which form of regulation is more effective when the government is under political pressure.
The economic model of campaign contributions and lobbying discussed by Finkelshtain was the “Protection for Sale” Model. In this model, lobby groups offer campaign contributions that are contingent on certain tariff rates. The incumbent government cares about campaign contributions as well as aggregate well being. In this model politicians are portrayed as maximizing social welfare, and individuals represented by a lobby group receive an extra weight compared to individuals who are not. This diverts the politicians from their underlying purpose—maximizing social welfare—and so falls directly under the definition of institutional corruption.
There are two important take-aways from this model. First, in the model, as more of the population is represented and as the ethical norms of the government increase, then the chosen policy is closer to free trade, which is the most efficient policy. Second, the dependence of the tariff rate in the model allows quantification of the level of institutional corruption. Researchers who study environmental regulations often use this model. One application of this theory is seen with the “not in my backyard” (NIMBY) problem. NIMBY refers to the issue of the placement of noxious facilities such as landfills. The government is subject to pressures by city level lobbies of landowners. Two solutions include: political internalization of negative externalities, in which the government is pressured symmetrically by all threatened communities, and so sticks to its principles and chooses the location that is most efficient; and equality and efficiency, in which the more equitably the homeownership is distributed in the area then the more likely the government is to choose the most effective location. This was seen with the case of a central landfill in Israel. They found that if politicians were not extremely corrupt then the placement of the landfill would be near the most efficient location.
Finkelshtain then moved on to discuss how this theory played into his empirical research on the Israeli water economy. As a country subject to arid and semi-arid conditions, water scarcity is a major concern in Israel. It is on the border of a desert with large fluctuations in annual precipitation and droughts that often last three or more years. In comparison to other countries, Israel uses a much higher percentage of its’ natural water resources. In order to overcome this issue Israel invested in a sophisticated and extensive national water carrier system and also has been increasingly relying on water production, which includes water recycling and desalination. While these measures are very expensive, they have become progressively more important as the availability of natural water decreases.
Farmers adjusted to the limitation of this resource by efficient water use, use of recycled water, and lobbying. The farmers in Israel are well organized with their one recognized lobbying group in the parliament. Intense political pressure by the farmers’ lobbying group and the corruption of the government led to a massive amount of over drafting of the water by the agricultural sector. There also appears to have been discrimination by the government in terms of the amount of water allocated to different agricultural sectors.
In the late 1980s, however, the water consumption of the agricultural sector gradually dropped due to significant increases in water prices. Although many political theorists believe that this was due to a decline in the amount of political power held by the farmers, Finkelshtain hypothesizes that it was due to the drop in the prices of crops and livestock in Israel. This led to declining water demand for irrigation because water was less profitable. Finkelshtain argues that this caused an unintended shift in the control regime from quotas to prices as the farmers’ water demand became lower than the quotas that they were allowed. He categorized this as a shift from direct interventions to a market-based intervention. The uniformity of the market-based price made lobbying much less effective as compared to lobbying under the individual quota system. Finkelshtain sees this as a potential correction for institutional corruption in cases in which the government is trying to regulate over-utilization of natural resources. Based on this background information and empirical analysis, Finkelshtain hopes to determine in future research if a nationwide uniform price would lead to even less effective lobbying and higher social welfare.
--Summary by Lianna Llewellyn