Why do growing economies continue to pollute the environment?
The link between economic growth and the environment is generally complex, and is often shaped by economic policy.
Across countries, advanced economies on average perform better in terms of both growth and environmental quality, while developing countries often stagnate with low growth and low environmental quality (Fact 1). However, fast-growing economies could end up polluting the environment, despite experiencing technological progress that could have been used to generate revenues for cleaning the environment (Fact 2).
A new study by the macroeconomists Evangelos V. Dioikitopoulos (King’s College London), Sugata Ghosh (Brunel University London) and Eugenia Vella (University of Sheffield, UK) attempts to explain these facts.
The researchers develop a theoretical model in which they assume that people who experience higher environmental quality think longer term and value the future more. This is in line with evidence from medical studies about the positive impact of environmental quality on human health, which can reduce mortality rates.
The findings help explain Fact 1 by indicating that better environmental quality increases an economy’s aspirations for the future, raises savings and growth and, in turn, the resources to reduce pollution. However, an economy with low environmental quality will be more impatient, which is translated into low savings, and in turn low growth.
The study also shows that it is possible for some advanced economies to perform badly in environmental terms despite experiencing technological progress, as illustrated by Fact 2. This is because the government, pursuing even higher growth, does not use the extra revenues generated by technological progress to clean up the environment but rather to finance traditional growth-enhancing types of expenditures, like investment in infrastructure.
These results of the study go some way towards explaining the situation in fast-growing economies like China, where a rise in productivity, higher investment in infrastructure and high growth rates exist side by side with some decline in the environmental quality.
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