National and international economic policy has usually ignored the environment. In areas where the environment is beginning to impinge on policy, as in the General Agree- ment on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA), it remains a tangential concern, and the presumption is often made that economic - growth and economic liberalization (including the liberalization of intemational trade) are, in some sense, good for the environment. This notion has meant that economy-wide policy reforms designed to promote growth and liberalization have been encouraged with little regard to their environmental consequences, presumably on the assumption that these consequences would either take care of themselves or could be dealt with separately. In this article we discuss the relation between economic growth and environ- mental quality, and the link between economic activity and the carrying capacity and resilience of the environment Economic Growth, Institutions, and the Environment
The general proposition that economic growth is good for the environment has been justified by the claim that there exists an empirical relation between per capita income and some measures of environmental quality. It has been observed that asincome goes up there is increasing environ- mental degradation up to a point, after which environmental quality improves. (The relation has an "inverted-U" shape.) One explanation of this finding is that people in poor countries cannot afford to emphasize amenities over material well-being. Consequently, in the earlier stages of economic development, increased pollution is regarded as an acceptable side effect of economic growth. However, when a country has attained a sufficiently high standard of living, people give greater attention to environmental amenities. This leads to environ- mental legislation, new institutions for the protection of the environment, and so forth. The above argument does not, however, pertain to the environmental resource basis of material well-being, a matter we shall return to subsequently. So far the inverted U-shaped curve has been shown to apply to a selected set of pollutants only (2, 3). However, because it is consistent with the notion that people spend proportionately more on environ- mental quality as their income rises, economists have conjectured that the curve applies to environmental quality generally (4). But it is important to be clear about the conclusions that can be drawn from these empirical findings. While they do indicate that economic growth may be associated with improvements in some environmental indicators, they imply neither that economic growth is sufficient to induce environ- mental improvement in general, nor that the environmental effects of growth may be ignored, nor, indeed, that the Earth's re- source base is capable of supporting indefinite economic growth. In fact, if this base were to be irreversibly degraded, economic activity itself could be at risk (5). There are other reasons for caution in interpreting these inverted U-shaped curves. First, the relation has been shown to be valid for pollutants involving local short- term costs (for example sulfur, particulates, and fecal coliforms), not for the accumulation of stocks of waste or for pollutants involving long-term and more dispersed costs (such as COJ, which are often in- creasing functions of income (6). Second, the inverted-U relations have been uncovered for emissions of pollutantsnot resource stocks. The relation is less likely to hold wherever the feedback effects of resource stocks are significant, such as those involving soil and its cover, forests, and other ecosystems. Third, the inverted-U curves, as they have been estimated, say nothing about the system-wide consequences of emission reductions. For example, reductions in one pollutant in one country may involve in- creases in other nollutants in the same country or transfers of pollutants to other...
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