Constraints in using economic instruments in developing countries: Some evidence from Thailand’s experience in wastewater management Lalita Rammont * , A.T.M. Nurul Amin Urban Environmental Management, Asian Institute of Technology (AIT), P.O. Box 4, Klong Luang, Pathumthani 12120, Thailand Keywords: Wastewater management Environmental policy Economic instruments Charges Subsidy Thailand abstract Economic instruments (EIs) are increasingly used in the implementation of environmental policies. A theoretical rationale for their use is based on the need to internalize externalities, whether negative or positive. Because of the freedom and market-conforming nature of their use, EIs are preferred to command and control regulatory instruments for controlling pollution. Yet, developing countries are far behind in using EIs. Existing literature cites ‘‘political economy’’ constraints in this regard. This paper attempts to go beyond characterization of the problem at such an abstract level. In the case of Thailand’s use of EIs in wastewater management, the nature of a political economy constraint is revealed by investigating reasons for underutilization of the Environmental Fund created by Thailand in 1992, together with polluter pays principle introduced at the same time. The investigation was conducted in three cities at two levels: (i) at management level, to determine the constraints encountered in obtaining the fund given for construction of wastewater treatment systems and (ii) at household level, to determine the attitude of residents towards related charges. The research identifies that the problems of willingness to charge and of willingness to pay have become intertwined. The way out from this impasse, the paper argues, is for elected leaders to take a proactive role (a) to explain to the voters the potential gains of paying the charges, and (b) to provide information on the respective city’s management and on environmental issues. Ó 2009 Elsevier Ltd. All rights reserved. Introduction An inadequacy of basic urban infrastructure and services, diminishing resources and inadequate management capacity are degrading the urban environment in developing countries (Choguill, 1996; Kyessi, 2005; Linn & Wetzel, 1994). Pollution of water, resulting from draining wastewater directly to water bodies, is not only degrading the environment but also causing serious deterioration of water quality. Governments are thus taking various measures to construct wastewater treatment plants (WWTP) to ensure treatment of wastewater before discharge to water bodies. However, huge capital cost (CC) for the construction of WWTP, and costs of operation and maintenance (O&M) are major barriers in wastewater management (WWM). Construction of WWTP depends particularly on central government funding or on borrowing from external sources. However, O&M costs are expected to be funded mainly from the budgetary resources of local governments. It is against this background that the use of economic instruments (EIs) 1 is rationalized for (i) supporting the CC component of WWM by government subsidy, which is justified as a policy for internalizing positive externalities associated with WWM, and (ii) recovering the O&M costs by levying pollution charges as an application of polluter pays principle (PPP) or a means for internalizing negative exter- nalities associated with the generation of wastewater and its disposal without treating. Despite the attractiveness of EIs for their freedom and market- conforming properties, a combination of regulatory instruments (RIs) and EIs often achieve the desired balance among different policy objectives more than the use of either alone. Whatever the policy mix chosen, problems of implementation arise from a variety of factors, i.e., administration, politics, inconsistencies and flaws in design (O’Connor, 1998). Russell and Powell (1996) caution that EI usage demands a high level of institutional capacity. Weak enforcement of environmental regulations is also a characteristic of many developing countries. This in turn can be a reflection of weak political commitment to environmental goals as well as a principal- agent problem in which poorly paid government officials experi- ence weak incentives for strict enforcement (O’Connor, 1998). Borge (2000) also views a strong political leadership as an advan- tage in opposing pressure from special interests. In choosing particular policy instruments, a government’s attitude to risk is also important. Politicians mostly respond to * Corresponding author. Tel.: þ66 2 524 6433; fax: þ66 2-524 6380. E-mail addresses: lalita.rammont@ait.ac.th, lalita063@yahoo.com (L. Rammont). 1 EIs, as toolkits of implementing environmental policy, include (i) charges, (ii) subsidies, (iii) deposit refund systems, (iv) market creation (e.g., emissions permit trading) and (v) financial enforcement incentives (Bernstein, 1993; Opschoor & Vos Han, 1989; Ryding, 1992). Contents lists available at ScienceDirect Habitat International journal homepage: www.elsevier.com/locate/habitatint 0197-3975/$ – see front matter Ó 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.habitatint.2009.05.003 Habitat International 34 (2010) 28–37