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 gro wth will lead to a worsening pollution problem; (b) tighter environmental r egulation will reduce economic growth; (c) trade liberalization will exacer bate environmental degradation, especially in developing countries with wea k environmental protection; (d) tighter environmental protection in the dev eloped 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 t o relocation of investment to developing countries with lax regulation, esp ecially 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 lite rature has neglected three important elements: (a) environmental innovation , (b) the international diffusion of environmental technologies, and (c) th e economic benefits of a cleaner environment. Future research should integr ate these elements into the debate. Analyses of endogenous environmental in novation in response to environmental policy, the tradable nature of enviro nmental technologies, the role of trade and foreign direct investment as ch annels of environmental-technology transfer to developing countries, the ef fects of local environmental policies in encouraging the adoption of such t echnologies in developing countries, and the economic benefits of a cleaner environment would contribute to the development of sound, well-coordinated economic and environmental policies.