SHRIMP OR BANANAS

This case discusses a serious environmental problem in Ecuador: the de ath of shrimp cultivated in the Bay of Guayaquil from fungicides wed i n the banana industry. The problem is notable because, unlike many ins tances of environmental degradation, the adverse effects appear immedi ately, not at some distant time in the future. Also, the effects are c oncentrated 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 degra dation is of secondary importance. Conventional economic thinking is t hat pollution is an instance of market failure, the market failing to assign the cost of pollution in the production function. Economists co nclude that the solution is government intervention By such measures a s taxation, the government can ensure that producers assume the full c ost of their activities. There is no surprise that rapid economic grow th results in instances of market failure. What happens, though, when governments are unable to fulfill their responsibility to correct exte rnalities? In Ecuador political fragmentation stymies the ability of g overnment to fulfill even the minimal tasks assigned to it by neoclass ical economics, The unchecked killing of shrimp by fungicides used by banana growers thus represents market and state failure. In the absenc e of economic incentives to abstain from using fungicides, and the abs ence of the political power to prohibit the we of the fungicides, it i s 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 sour ce of employment. Despite the absence of much hope, the prospect of to tal ruin compels shrimp farmers to think systematically how, with the resources they command, they can prod the slate into protecting their livelihood. In the political battle for survival, shrimp farmers confr ont the importance of information and the ways in which uncertainty is used against them. Shrimp farmers ave convinced that their cause is j ust, but ironically they are denied the likely support of a potential ally-international ecology organizations-because shrimp farmers themse lves are judged to harm the environment through their destruction of m angroves. The dominant mentality in Latin America, especially in the p rivate sector, is that govern ment is only a hindrance, and the more i ts activities are curtailed, the better. Ecuador's beleaguered shrimp industry, though, makes a powerful argument that a modem economy needs a strong, capable state. The accumulated evidence of the post-World W ar II epoch demonstrates that the state is not an efficient producer o f goods. But the need for the state to regulate economic activity is m ore pronounced than ever. (C) 1997 Elsevier Science Inc.