Is economic growth good forthe environment?

Introduction

Is economic growth good or bad? One reason for thinking itmay be bad is that growth may be associated with an increasein environmental degradation. New empirical evidence, how-ever, indicates that growth need not harm the environment. Itsuggests that, though environmental quality may worsen withgrowth in poor countries, it eventually improves with growthonce countries become sufficiently rich. Figure 1 presents anexample from the literature. It shows that sulphur dioxideemissions per capita first increase with real income per capita(corrected for purchasing power) and later decrease. Whetherthis new evidence endorses the "growth is good" or the"growth is bad" view is now a subject of much debate.

In this article I review this evidence and discuss its impli-cations both for the debate on the links between growth andthe environment and for policy - both economic and environ-mental policy. I show that the inverted-U relationship isentirely consistent with economic theory - though so are manyother possible relationships. The emerging literature in thisfield suggests that the inverted-U is a statistical regularity, butI show that the evidence for the inverted-U is actually ratherweak. I also argue that the models upon which these estimatesare based may be inappropriate. Even ignoring these matters,however, I argue that the new empirical evidence has little tosay about the question of whether economic growth is goodor bad and that it furthermore has little relevance to policy.

Theory

Relationships like the one shown in Figure 1 are derived fromreduced form models that show how some measure of envi-ronmental degradation depends on income per head. Suchmodels do not explain why the environmental variable de-

pends on income per head. They merely describe how incomeper head and the environment are related. However, upon alittle reflection it is easy to see why environmental degrada-tion might depend on income per head.

Environmental degradation in a country will depend on:the scale of economic activity (Gross Domestic Product, orGDP), the composition of GDP (the shares in GDP of differentsectors), and the technique for producing GDP (Grossman,1993). The scale effect is direct and implies a positive asso-ciation: more growth means more pollution. But there are alsoindirect effects. As incomes rise, the composition of outputmay change. Initially, agriculture’s share in GDP may shrinkwhile industry’s rises; at higher income levels, industry’sshare may fall and services’ share grow. Pollution associatedwith industrial production may thus follow the inverted-Usimply as a consequence of the process of development.

Though the literature has not estimated a structural modelof environmental degradation, Grossman, Krueger and Laity(1994), using data only for different counties in the US,control for the composition effect and find that variations inthe composition of income are not a major factor affecting theincome-environment relationship. The composition effect isoften statistically significant, but the nature of the income-en-vironment relationship is unaffected by including this effect.Though this analysis is based only on US data, it suggests thatthe technique effect may be especially important.

The technique effect captures changes in emissions perunit of output for any given sector. The technique effect thusreflects local environmental regulation, and this will in turnbe affected by incomes. The technique effect also reflectstechnical change that is independent of local regulation. InGrossman’s (1993) words, "As per capita incomes rise, citi-zens may express greater demands for a cleaner and healthierenvironment." The reasoning here seems to be that the incomeelasticity of demand for environmental improvements is in-creasing in the level of income. Environmental improvementsmay be a "normal good" everywhere but a "necessary" goodin poor countries and a "luxury" good in rich countries. Thissuggests that the demand for environmental improvements

Recent research shows that environmental quality may improve with economicgrowth, at least in the high-income countries, Scott Barrett reviews this research.He argues that it is not very robust and has little significance either for economic orenvironmental policy.

Scott Barrett is an Associate Professor of Economics atLondon Business School. This article draws from researchfunded by a MacArthur Foundation grant to the GlobalEnvironment and Trade Study.

Economic Outlook

February 1997 18

increases with income less than proportionately in poor coun-tries and more than proportionately in rich countries. Hence,the inverted-U.

It is not just the demand for an improved environment thatmatters, however. Whether citizen preferences find expres-sion in environmental regulations also matters. In this regard,Congleton’s (1992) empirical analysis of environmental regu-lations concludes that "liberal democracies are more willingto regulate environmental effluents than less liberal regimes,"while Barro’s (1994) empirical analysis of democracy andgrowth finds that "political freedom emerges as a sort ofluxury good." This suggests that the association betweenincome and environmental degradation varies with the extentof political freedoms. The declining segment of the inverted-U may thus reflect the increase in political freedom associatedwith higher income. Grossman and Krueger (1993) comenearest to capturing this effect. They find that concentrationsof sulphur dioxide (SO2) and particulate matter are higher inthe Communist-ruled countries, all else being equal.

Where the environmental problem is transboundary, coun-tries will have little unilateral incentive to reduce their cross-border emissions and be unable to sustain an effective multi-lateral agreement that does so. To the extent that regulation isresponsible for the inverted-U curve, it is thus likely thatemissions that contribute to a global public bad (like climatechange) may only increase with economic growth because ofthe scale effect. Theoretically, then, the inverted-U is entirelyplausible, though of course other relationships are also possi-ble. We should not be surprised that an inverted-U relation-ship has been detected in the data. Nor should we be surprisedthat other relationships have also been detected. The impor-tant questions are whether the inverted-U really does describethe relationship between environmental degradation and in-come, whether we can have confidence in the relationshipsthat have been estimated, and whether we can derive fromthese results useful implications for policy. These questionsare addressed in the rest of the paper.

The new evidence

A summary of some of the findings of the literature is shownin Table 1 (overleaf). It shows whether the inverted-U holdsfor particular studies and environment variables; and, if so, atwhat income level the relationship turns from being positiveto negative. This is indicated by the last two columns in thetable. Estimates are shown for sulphur dioxide (SO2) andsuspended particulates, two "local" air pollutants, and carbondioxide (CO2), an important "greenhouse gas."

Estimation and data

As noted earlier, all the studies cited in Table 1 estimatereduced form models. Their aim is to determine whether andhow income per capita determines environmental degrada-tion. Other independent variables may be included in theregressions, but these should not be correlated with incomes.The reduced form models thus aim to capture both the directand indirect effects of incomes on environmental degradation.

A number of different environment variables are used inthese studies. Some employ a variable which is a directmeasure of environmental degradation, an example being theconcentration of SO2 in the air, which can cause or aggravatecertain respiratory diseases. Other studies employ a variablewhich is a determinant of environmental degradation, anexample being the emissions of SO2.

These different variables are not directly comparable, andcare must therefore be taken in interpreting the results. Deg-radation of the environment depends on more than just thelevel of the emissions of a particular pollutant; it depends alsoon the distribution of emissions (over space, altitude, andtime), the "assimilative capacity" of the receiving environ-ment, and the presence of other pollutants (the harmful healtheffects of SO2, for example, are exacerbated by high concen-trations of particulates).

There are also a number of problems with the data, not leastthe fact that little data are available. Data for the differentkinds of air pollution examined by Grossman and Krueger(1995) cover just 19-42 countries over the years 1977, 1982,and 1988. Data used by Selden and Song are for 32 countries,only two of which are "low-income" (China and India) andonly 6 of which are "middle income." We should be wary ofusing statistical analysis of so few observations to makesweeping generalizations.

Results

What does Table 1 tell us? It tells us that not every environ-ment variable obeys the inverted-U shape and that, for somemeasures of environmental degradation, the relationship withincome per head is not robust. A more detailed investigationof the literature reveals other important irregularities.

2.6 3.9 5.3 6.6 8.0 9.3 10.7 12.0 13.4 14.7 16.1200

300

400

500

600

700

800

900

1,000

Real per capital GDP (thousands of dollars)

Sul

phur

dio

xide

em

issi

ons

(kg

per c

apita

)

Derived from Selden and Song’s (1994) random effects model without population density.

GDP and sulphur emissions

Economic Outlook

19 February 1997

Sulphur dioxide

Though the evidence suggests that SO2 concentrations do tendto increase and then decrease with increases in per capitaincome, estimates of turning points vary. Most obviously,Grossman, Krueger, and Laity (1994) estimate a turning pointfor SO2 concentrations that is around three times the size ofthe turning point estimated by Grossman and Krueger (1993,1995).

At least superficially, the difference in these turning pointscan be traced to differences in the data. The former study useddata for different counties in the United States over a thirtyyear period while the latter two studies used data for about 50countries spread over a 13 year period (Grossman, Krueger,and Laity, 1994). What we don’t know, however, is why thedifferent data should indicate such different turning points.Indeed, it is perhaps more appropriate to ask why there is aturning point in the Grossman, Krueger, and Laity (1994)study. At the high incomes for the United States, earlier workby Grossman and Krueger would suggest that SO2 concentra-tions should be decreasing in income per capita.

Another potential problem with the estimated inverted-Urelationship for SO2 concentrations is that the cubic functionestimated by Grossman and Krueger (1995) shows that therelationship becomes positive again for incomes exceeding

$16,000. Though Grossman and Krueger (1995) claim that wecannot have much confidence in the shape of the curve in thisrange because of the small number of observations, this evi-dence at the very least points to the dangers in extrapolatingfuture trends outside the sample.

The turning points for SO2 emissions per capita and con-centrations are also far apart. Does this point to anotherinconsistency? Selden and Song (1994) think not. They arguethat reductions in emissions should be expected to occur at ahigher income level for several reasons: (1) pollution concen-trations harm human health, and the damage caused by highconcentrations will be greater than the damage caused byemissions; (2) reductions in pollution concentrations can beachieved more cheaply than reductions in emissions (forexample, stacks can be raised or industry re-located); (3)industry will tend to re-locate away from urban areas whereconcentrations are greatest as higher incomes push up landrents; and (4) incomes in urban areas where pollution concen-trations are greatest tend to be higher than national averageincome levels. These explanations are entirely plausible, butGrossman (1993) thinks the result may simply be "an artifactof the way in which the data on estimated emissions areconstructed." A further possibility is that the estimate of theturning point is biased because, "less developed countries areunder-represented in the sample."

Table 1: The Growth-Environment Relationship

Study Environment Variable Inverted-U? Turning Point

Grossman & Krueger SO2 concertration Yes, though the relationship turns $4,107-$6,182(1993) positive at high income levels

Dark matter concentration Yes $4,240-$4,971Suspended particles No; negative relationship for random effects -concentration model and positive relationship model with

fixed site effects

Grossman & Krueger SO2 concentration Yes, though the relationship turns positive $4,053(1995) at high income levels

Smoke concentration Yes $6,151Heavy particles concentration No; negative relationship -

Grossman, Krueger TSP concentration No; rises at a decreasing rate -& Laity (1994) SO2 concentration Yes ~ $14,000

Selden & Song (1994) SO2 emissions per capita Yes $8,709-$10,681Suspended particulate matter Yes $9,511-$10,289emissions per capita

Holtz-Eakin & Selden (1995) CO2 emissions per capita No; rises at a decreasing rate -

Schmalensee, Stoker & CO2 emissions per capita Yes ~ $10,000Judson (1995)

Shafik (1994) SO2 concentration Yes $3,670Suspended particulate matter Yes $3,280concentrationCO2 emissions per capita No: positive relationship -

Economic Outlook

February 1997 20

Suspended particulates

In the case of concentrations of suspended particulates, a greatvariety of relationships are described by the literature. Gross-man, Krueger, and Laity (1994), using data for the UnitedStates, find that concentrations of total suspended particulatesincrease with income at a decreasing rate; Grossman andKrueger (1993), using cross-country data, find that concentra-tions of suspended particles decrease with income in onemodel and increase with income in another model; Grossmanand Krueger (1995), again using cross-country data, find thatthe concentration of heavy particles (a category of particulate)decrease with per capita incomes; Shafik (1994) finds thatconcentrations of suspended particulate matter obey an in-verted-U relationship; and Grossman and Krueger (1993,1995) also estimate an inverted-U relationship for concentra-tions of dark matter and smoke (two other categories ofparticulate). The lack of consistency across these studies isastonishing.

Analysis of particulate emissions offers little additionalinsight. Selden and Song (1994) find that suspended particu-late emissions per capita follow an inverted-U, but dependingon the relationship that exists between population and income,the above estimates could be consistent with any of theestimated relationships between particulate concentrationsand per capita income.

The only sensible conclusion that can be drawn from thesestudies is that we do not know how suspended particulateconcentrations are related to per capita income. This is unfor-tunate, since particulates are one of the most important formsof urban air pollution.

Carbon dioxide

The relationships for CO2 emissions also vary across thestudies. Holtz-Eakin and Selden (1995) and Shafik (1994)find a positive relationship between CO2 emissions and in-comes per capita whereas Schmalensee, Stoker and Judson(1995) find that, for the high-income countries, the relation-ship is negative.

In fact, the former two studies do find evidence of aninverted-U relationship but the estimated turning points inthese studies are outside the sample ranges (for the Holtz-Eakin and Selden study, the turning point is between $35,428and $8 million, depending on the model specification). Obvi-ously, in these cases, estimation of these turning points is anartifact of the functional form used to fit the regression. If thecoefficient on the squared income term is negative, but theturning point occurs at an income level outside the sample,the quadratic relationship is only showing that emissions riseat a decreasing rate, not that emissions will turn down at higherincome levels.

It is possible that the different results can be traced to thefunctional specification of the model. Holtz-Eakin and Selden

(1995) estimate a quadratic relationship (in both the levels andthe logs) and Shafik (1994) estimates linear, quadratic, andcubic relationships (all in logs), whereas Schmalensee, Stokerand Judson (1995) estimate a spline (piecewise linear) speci-fication. Note, however, that the spline function also showsthat carbon emissions fall with income for very low values ofGDP per capita. Hence, compared to the polynomial function,the spline function describes a different relationship betweenCO2 emissions and income at both tails. Unfortunately,though Schmalensee, Stoker and Judson (1995) also fit apolynomial to the data, they do not report the results. Hence,it isn’t so clear whether the different results can be traced tothe functional form or the data.

Specification issues

The estimates shown in Table 1 are obtained from models thatignore a number of potentially important interdependencies,which are discussed below.

Trade linkages

If trade is liberalized, output of the pollution-intensive indus-tries could shift from rich countries to poor, and the growthaccompanying trade liberalization would then be reflected inan increase in emissions (and pollution) in poor countries anda reduction in emissions (and pollution) in rich countries (seeArrow et al., 1995; Grossman and Krueger, 1995). This shiftin the composition of production could be a response to therelatively weaker environmental standards in poor countries,but it could just as easily reflect other sources of comparativeadvantage exploited by a more liberalized trade regime. What-ever the underlying causes of the shift, if trade liberalizationwere the reason behind the inverted-U, then emission levelsin poor countries would not follow the same inverted-Uestimated in the literature. The inverted-U would thus be a badpredictor of how environmental degradation will change withgrowth. As Grossman and Krueger (1995) point out, "futuredevelopment patterns could not mimic those of the past".

Grossman and Krueger (1995) argue that "the availableevidence does not support the hypothesis that cross-countrydifferences in environmental standards are an important de-terminant of the global pattern of international trade" (see alsoGrossman and Krueger, 1996). This is a fair reading of theevidence, but it is also true that the hypothesis can’t berejected. Lucas, Wheeler and Hettige (1992), for example, areunable to reject the hypothesis that "stricter regulation ofpollution-intensive production in the OECD countries has ledto significant locational displacement, with consequent accel-eration of industrial pollution intensity in developing coun-tries." Moreover, as noted above, the movement of pollutionfrom rich to poor countries needn’t be driven by differencesin environmental standards. The movement of productioncould simply reflect comparative advantage (after controllingfor differences in environmental standards).

Economic Outlook

21 February 1997

Pollution linkages

The studies cited in Table 1 treat different forms of degrada-tion as being independent. They are not. SO2 emissions notonly cause local air quality problems but can also, whentransported long distances, react with water in the air and fallas acid rain. Furthermore, the reduction in one form of degra-dation can be associated with changes in some other form ofdegradation.

Construction of tall stacks, for example, can reduce oneform of pollution (urban air pollution) while at the same timeincreasing another (acid rain). Evidence that urban concentra-tions of SO2 fall with income may not constitute evidence thatthe environmental degradation associated with sulphur emis-sions falls with income (though of course there is evidencethat total SO2 emissions also obey the inverted-U). Similarproblems arise in the case of emissions data. Reductions inSO2 emissions may be achieved by substituting away fromcoal, with the consequence that CO2 emissions are also re-duced; alternatively, SO2 emissions may be reduced by scrub-bing, in which case CO2 emissions may rise.

Cross-border pollution

Pollution also crosses borders. The studies cited in Table 1 donot comment on this possibility, perhaps because most ofthem analyze local pollution or national emissions. However,even levels of "local" pollution reflect transborder flows,especially in border areas.

Environmental policies are also sometimes coordinated,perhaps the best example being the European Union. Thoughincome per capita varies by a factor greater than two withinthe Union, all countries are subject to the same air qualitystandards for SO2 and particulates. The Union also regulatestotal emission levels for SO2 by large combustion plants aswell as the emissions of individual facilities and automobiles.Similarly, a number of bilateral agreements govern joint man-agement of the environment along the two borders of thecontinental United States. In some cases the United Statespays for the larger part of the cost of reducing emissions justsouth of its border with Mexico.

Simultaneity

The econometric relations summarized in Table 1 assume thatincomes affect environmental degradation and that cause andeffect are not also reversed. However, environmental degra-dation can also impair economic growth, and almost certainlydoes in poor countries. Arrow et al. (1995) emphasize thefeedback effects between environmental resource stocks andmaterial well-being, but feedbacks may also be a feature ofthe local environmental problems examined by the literature.For example, the World Bank (1992) reports that excessiveconcentrations of suspended particulates cause between300,000 and 700,000 premature deaths a year in developingcountries and decrease the productivity of the workforce in

urban areas by 0.6 to 2.1 working days a year for everyemployed adult.

What does the inverted-U tell us?

Having reviewed the evidence, let us return to the questionthat opened this article: Is economic growth good or bad?

The "growth is bad" argument was made famous by theClub of Rome report, The Limits to Growth, which predictedthat, if the world continued to develop as it had in the past,pollution would increase exponentially until the limits togrowth had been reached and industrial output collapsed. Toavoid Doomsday, the Club of Rome report concluded, growthwould have to be constrained. This conclusion remains afeature of the literature today, though the modern version ofthe argument adds the twist that the most important environ-mental damage may not be pollution but a loss of ecologicalresilience, that ecological harm may ultimately underminegrowth prospects, and that a loss in resilience can be suddenand irreversible.

Evidence of the inverted-U certainly wrecks the assump-tion that growth inevitably worsens pollution, but it doesnothing to dispel the concern that the increasing scale ofeconomic activity may threaten the functioning of ecosys-tems. The literature has estimated the inverted-U for particularpollutants, not whole categories of pollutants and certainly notmeasures of ecosystem services.

The "growth is good" argument maintains that a risingstandard of living will provide the wherewithal to stop andeven reverse environmental harm (see, for examples, Simon’sessay in Myers and Simon, 1994; and Beckerman, 1992). Notonly will growth provide the resources needed to effect envi-ronmental improvements, but it will also provide technologiesthat reduce the environmental damage associated with anylevel of output and the social institutions needed to createincentives for the development of such technologies.

The inverted-U could be seen to support this view but onecannot assume that environmental protection along the in-verted-U is socially "optimal." Nor, as contributors to thisliterature have pointed out, can it be assumed that the inverted-U is "inevitable." Finally, not every measure of environmentaldegradation obeys the inverted-U. Some measures seem toincrease with incomes; and as one moves beyond the samplerange it is possible that the relationship will change. As notedearlier, there is some evidence that the relationship may turnpositive at very high income levels.

An obvious but often neglected observation is that even asuperficial reading of the inverted-U fails to endorse fullyeither side to the debate. Though the evidence showing thatthe environment eventually improves with increases in in-come per head has been enlisted to support the "growth isgood" viewpoint, the evidence that environmental qualityworsens with growth at low income levels endorses the"growth is bad" orthodoxy. In fact, since most of the world is

Economic Outlook

February 1997 22

to the left of the income level at which the relationship attainsa peak, in the aggregate or on average, the new evidencesuggests that growth will harm the environment before it hasthe chance to help.

More importantly, however, the new literature cannot an-swer the question of whether growth is good or bad. Toconstruct a rigorous answer one would require a proper ac-counting of a society’s well-being (only in this context couldone comment meaningfully on whether growth was "good" or"bad"), and the conventional measure of national income isnot suitable for this purpose, not least because it fails toaccount fully for environmental damage and depreciation ofenvironmental resources (see Dasgupta and Mäler, 1995). Acountry’s well-being could be increasing even as it crawls upthe rising portion of the inverted-U. Equally, along the fallingsection of the curve, pollution could still be "excessive" in thesense that the benefit of reducing the pollution exceeded theassociated cost in terms of society’s well-being.

Policy implications

What then does the inverted-U mean for policy? The mainlesson that Grossman and Krueger (1996) draw from theirstudies "is that efforts to contain growth may be counter-pro-ductive, even from a narrow environmental perspective."Given the controversy that has surrounded this literature, thisseems a rather a weak conclusion. Very few people haveargued that the environment would be best protected byhalting growth. Indeed, growth is about as blunt an instrumentas one could imagine for the purpose of protecting the envi-ronment; a country could always do at least as well protectingits environment directly (by regulating emissions, protectinghabitat, and so forth). We should not, however, have expecteda greater insight to emerge from inverted-U. As Arrow et al.(1995) put it:

"The solution to environmental degradation lies insuch institutional reforms as would compel privateusers of environmental resources to take account ofthe social costs of their actions. The inverted-Urelation is evidence that this has happened in somecases. It does not constitute evidence that it willhappen in all cases or that it will happen in time toavert the important and irreversible global conse-quences of growth."

The inverted-U has thrown some light, but not much, onthe links between growth and the environment. However,policy-makers should beware of the spurious simplicity itappears to offer to complex economic policy and environ-mental issues. �

References

Arrow, K. et al. (1995), "Economic Growth, CarryingCapacity, and the Environment," Science: 268: 520-1.

Barro, R.J. (1994), "Democracy and Growth," NationalBureau of Economic Research Working Paper No. 4909,October.

Beckerman, W. (1992), "Economic Growth and theEnvironment: Whose Growth? Whose Environment?"World Development, 20: 481-496.

Congleton, R.D. (1992), "Political Institutions and PollutionControl," Review of Economics and Statistics, 74:412-421.

Dasgupta, P. and K.G. Mäler (1995), "Poverty, Institutions,and the Environmental Resource-Base," in J. Behrman andT.N. Srinivasan (eds.), Handbook of DevelopmentEconomics, Amsterdam: Elsevier.

Grossman, G.M. (1993), "Pollution and Growth: What do WeKnow?" CEPR Discussion Paper No 848.

Grossman, G.M. and A.B. Krueger (1993), "EnvironmentalImpacts of a North American Free Trade Agreement," inP. Garber (ed.), The US-Mexico Free Trade Agreement,Cambridge: MIT.

Grossman, G.M. and A.B. Krueger (1995), "EconomicGrowth and the Environment," Quarterly Journal ofEconomics, 110: 353-77.

Grossman, G.M. and A.B. Krueger (1996), "The Inverted-U:What Does it Mean?" Environment and DevelopmentEconomics, 1: 119-122.

Grossman, G.M., A.B. Krueger, and J. Laity (1994),"Determinants of Air Pollution in US Counties," mimeo,Princeton University.

Holtz-Eakin, D. and T.M. Selden (1995), "Stoking the Fires?CO2 Emissions and Economic Growth," Journal of PublicEconomics, 57: 85-101.

Myers, N. and J.L. Simon (1994), Scarcity or Abundance? ADebate on the Environment, New York: W.W. Norton.

Selden, T.M. and D. Song (1994), "Environmental Qualityand Development: Is there a Kuznets Curve for AirPollution Emissions?" Journal of EnvironmentalEconomics and Management, 27: 147-162.

Schmalensee, R., T.M. Stoker, and R.A. Judson (1995),"World Energy Consumption and Carbon DioxideEmissions: 1950-2050," mimeo, MIT, June.

Shafik, N. (1994), "Economic Development andEnvironmental Quality: An Econometric Analysis,"Oxford Economic Papers, 46: 757-773.

World Bank (1992), World Development Report 1992,Oxford: Oxford University Press.

Economic Outlook

23 February 1997