Shrimp or bananas

Abstract

This case discusses a serious environmental problem in Ecuador: the death of shrimp cultivated in the Bay of Guayaquil from fungicides used in the banana industry. The problem is notable because, unlike many instances of environmental degradation, the adverse effects appear immediately, not at some distant time in the future. Also, the effects are concentrated on an important industry in the private sector, instead of a marginal cost to a disperse “public.” Thus, this case challenges the notion sometimes common in poor countries that environmental degradation is of secondary importance. Conventional economic thinking is that pollution is an instance of market failure, the market failing to assign the cost of pollution in the production function. Economists conclude that the solution is government intervention. By such measures as taxation, the government can ensure that producers assume the full cost of their activities. There is no surprise that rapid economic growth results in instances of market failure. What happens, though, when governments are unable to fulfill their responsibility to correct externalities? In Ecuador political fragmentation stymies the ability of government to fulfill even the minimal tasks assigned to it by neoclassical economics. The unchecked killing of shrimp by fungicides used by banana growers thus represents market and state failure. In the absence of economic incentives to abstain from using fungicides, and the absence of the political power to prohibit the use of the fungicides, it is not clear that the shrimp industry in Ecuador will survive. Yet more is at stake than someone's business: shrimp exports are the country's third most important source of foreign exchange and an important source of employment. Despite the absence of much hope, the prospect of total ruin compels shrimp farmers to think systematically how, with the resources they command, they can prod the state into protecting their livelihood. In the political battle for survival, shrimp farmers confront the importance of information and the ways in which uncertainty is used against them. Shrimp farmers are convinced that their cause is just, but ironically they are denied the likely support of a potential ally—international ecology organizations—because shrimp farmers themselves are judged to harm the environment through their destruction of mangroves. The dominant mentality in Latin America, especially in the private sector, is that government is only a hindrance, and the more its activities are curtailed, the better. Ecuador's beleaguered shrimp industry, though, makes a powerful argument that a modern economy needs a strong, capable state. The accumulated evidence of the post-World War II epoch demonstrates that the state is not an efficient producer of goods. But the need for the state to regulate economic activity is more pronounced than ever.