Reason Roundtable

The Role of Market Institutions in Enabling Adaptation to Climate Change

Best solutions enable people to prosper and avail themselves of all the adaptive measures that the wealthy can afford

Public discussion of climate change is dominated by individuals and groups who assert that humanity must reduce emissions of greenhouse gases in order to avert catastrophe. But such a cure may well be worse than the disease. Nevertheless, there are things that can be done right now to reduce both the problems people face today – and the magnitude of any problems that might result from climate change in the future.

Climate – the prevailing weather – is a major problem for most people. People die or are injured both when it is very hot and when it is very cold. Agricultural productivity is also adversely affected both by frosts and long periods of high temperatures. Meanwhile, droughts, floods and storms have a variety of negative impacts.

While climate affects everyone, it disproportionately affects poor people because they are less able to adapt. The wealthy are able to limit direct effects by constructing robust buildings, with efficient heating and cooling systems. They also have wider access to the better warning systems afforded by mass media and communications technologies, enabling them to more quickly escape adverse events. So, if poor people could escape from poverty, they would be less exposed to the ravages of climate – right now and in the future.

Some alarmists allege that climate change will lead to rapidly rising sea levels, causing flooding in low-lying areas and displacing large numbers of people. Xenophobes conjure up images of barbarians at the gates. Bangladesh is often cited as a country particularly at risk because a large proportion of its 130 million inhabitants live in a low-lying river delta which periodically experiences massive flooding and other severe weather events. But is climate change the real threat to Bangladesh? Compare it with Holland, a country of around 11 million inhabitants, most of which lies below sea-level – and yet has not experienced a flood since 1953.

Why is Bangladesh so much more at risk of losing human life and experiencing economic losses from flooding than Holland? The answer is that Holland has been a liberal democracy for over three centuries and has benefited from more-or-less continuous economic growth during that period. By contrast, prior to independence in 1971, Bangladesh was ruled by a series of oppressive absentee landlords (the Moguls, the British, Pakistan). Since independence, it has been ruled by a series of oppressive and/or incompetent elected officials. As a result, and in spite of (perhaps even in part because of) billions of dollars in foreign “aid,” the majority of its inhabitants remain poor and disenfranchised, unable to control their immediate environment. So, whereas the Dutch have installed increasingly complex and effective measures to drain the land and prevent flooding, the unaccountable rulers of Bangladesh have squandered taxes and foreign aid on projects that further their own political ends instead of investing in flood defenses.

Another alleged consequence of climate change is the spread of vector-borne and bacterial diseases. As with climate in general, these diseases are a problem today and they affect the poor far more than the wealthy. Vector-borne diseases, such as malaria and dengue, are essentially diseases of poverty. Many wealthy countries once experienced levels of vector-borne diseases similar to those now experienced by poor countries. In the 14th century, one-third of Europe’s population died from the Black Death, spread by fleas that thrived on rats living in the sewers of medieval towns.

Today, each year between one and three million people die from malaria. A similar number die from dehydration as a result of diarrhea. And approximately two million people die every year from respiratory infections brought on in part by indoor air pollution. Most of these six million total deaths are preventable. Wealthy countries have largely eliminated such diseases through a combination of environmental interventions (such as the use of pesticides), improved water supplies (piping to the home and purification) and sanitation systems, improved energy delivery systems (including grid electricity), improved agriculture (which has dramatically reduced malnutrition), and the development of vaccines and medicines.

Of course, there are other alleged threats associated with climate change. But many of these are also merely extensions of existing problems. For example, it is claimed that the world’s biological diversity is threatened by extinction. Yet, the main reason for the loss of biological diversity globally is the conversion of habitat for human uses, especially agriculture. While future changes in climate may affect biodiversity (positively or negatively), a far more significant change could be brought about by improving the incentives of people to manage habitat more sustainably.

For this to occur, people must have fewer incentives to convert biodiverse land to other uses. But there will be continued pressure to increase food production, as more people seek a nutritious diet. So, if rates of conversion of wild-lands are to be reduced, people must be able to farm more intensively. In addition, if people living on biodiverse lands were able to benefit from conservation through ownership of the wildlife on their land, they would be less likely to view that wildlife as a nuisance and so would be less likely to kill it.

In general, the best policy for reducing the vulnerability of people to potentially negative aspects of climate change is one that enables people to prosper and thereby avail themselves of all the adaptive measures that the wealthy can afford. But what will lead to this clean, green growth? The overwhelming body of evidence suggests that the key is to ensure that society is governed by appropriate “institutions.” Institutions are the framework within which people act and interact – they are the rules, customs, norms, and laws that bind humans to each other and act as boundaries to human behavior.

And the institutions that are most conducive to sustainable development are the institutions of the free society — property rights, contracts, and the rule of law (see for more on this point). These institutions enable adaptation by fostering resilience in the face of uncertainty. The absence of such institutions creates poverty and vulnerability to change in general.

Well-defined, readily enforceable and transferable property rights are capital: they give people incentives to invest in their land and other resources (such as wildlife) and they give people an asset against which to borrow, so that they might become entrepreneurs. Likewise, when people are able to benefit from the investments they make through ownership of property, they have incentives to innovate new technologies.

Freedom of contract includes both the freedom to contract – the freedom to make whatever agreements one desires, subject to fair and simple procedural rules – and the freedom from contract – the freedom not to be bound by the decisions of others. Freedom of contract is a fundamental part of the freedom to associate with others. It includes the freedom to transact – to buy and sell property – and as such it is an essential adjunct to the right to clearly defined and readily enforceable property rights.

Contracts and property rights underpin the functioning of markets. The freedom from contract prevents others from attempting to interfere with one’s right to engage in exchange. The freedom to contract also enables people to bind themselves to agreements and thereby creates greater legal certainty. This, in turn, encourages people to engage in trade and investment. Armed with enforceable property rights and contracts, the peasant becomes a merchant.

Finally, the rule of law, brokered by an independent and fair judicial system, is necessary to ensure that property rights, contracts and the freedoms associated with a democratic and free society are upheld, respected and enforced for all members of that society. The absence of the rule of law – that is, when the power of discretion is vested in politicians, bureaucrats and civil servants – is an invitation to bribery and corruption. In this situation, economic and entrepreneurial activity becomes dependent exclusively on political maneuvering rather than on its benefits to consumers, society, and the environment.

The adoption of the institutions of the free society by poor countries would lead to more dynamic, competitive, and entrepreneurial economies. Competing producers would seek to satisfy consumers with better goods at a lower cost. The drive to reduce costs would lead producers to innovate and use technologies that consume fewer resources. Consumers, who control their own wealth, would have an incentive to procure goods whose operation requires fewer resources such as gas or electricity. Meanwhile, the large surpluses generated from this cycle of wealth could be devoted to enhancing environmental amenities and preventing pollution.

This is certainly the pattern in countries that are now relatively wealthy. The following are some examples of the consequences that would likely follow:

  • Better water and wastewater management, enhancing access to safe drinking water, reducing deaths from diarrhea and related diseases, and decreasing the incidence of diseases transmitted by insects that breed in stagnant water.
  • Better education and access to information, reducing diseases associated with improper sanitation and sexually transmitted diseases, and enhancing capacity to develop new technologies.
  • Improved access to affordable, reliable and cleaner forms of energy and other life-improving technologies, such as refrigeration, air conditioning, and more efficient building structures.
  • Enhanced environmental protection and conservation of natural resources.
  • Research and development of new energy, construction, transportation, food production, heating and cooling technologies.
  • Economic diversification and higher incomes — as people’s labor becomes more valuable, fewer people are engaged in lower-value economic activities such as agriculture.

In sum, universal adoption of the institutions of the free society would better enable adaptation to climate both now and in the future. It would also ensure that, if at some point in the future, a real catastrophe – whether human-induced or otherwise (including climate change) – does loom on the horizon, humanity would be in a better position to address it.

Julian Morris is Executive Director of International Policy Network ( and a Visiting Professor at the University of Buckingham. This essay is based on a speech to the Mont Pelerin Society in 2004 and is part of Reason’s Roundtable on policy solutions to global warming.