ECONOMIC GROWTH, LIBERALIZATION, AND THE ENVIRONMENT: A Review of the Economic Evidence

This paper reviews the empirical evidence for the following five hypotheses from the economic growth-liberalization-pollution debate: (a) economic growth will lead to a worsening pollution problem; (b) tighter environmental regulation will reduce economic growth; (c) trade liberalization will exacerbate environmental degradation, especially in developing countries with weak environmental protection; (d) tighter environmental protection in the developed countries will lead to a loss of competitiveness compared with that of countries with lower standards, especially in polluting industries; and (e) tighter environmental protection in the developed countries will lead to relocation of investment to developing countries with lax regulation, especially in polluting industries (the pollution haven hypothesis). Overall, the evidence for these hypotheses is found to be ambiguous and weak. It is further suggested that the growth-liberalization-environment empirical literature has neglected three important elements: (a) environmental innovation, (b) the international diffusion of environmental technologies, and (c) the economic benefits of a cleaner environment. Future research should integrate these elements into the debate. Analyses of endogenous environmental innovation in response to environmental policy, the tradable nature of environmental technologies, the role of trade and foreign direct investment as channels of environmental-technology transfer to developing countries, the effects of local environmental policies in encouraging the adoption of such technologies in developing countries, and the economic benefits of a cleaner environment would contribute to the development of sound, well-coordinated economic and environmental policies.