Relief for the environment? The importance of an increasingly unimportant industrial sector

Economic Inquiry, April, 2008 by Martin Gassebner, Noel Gaston, Michael J. Lamla

I. INTRODUCTION

Among the more controversial views about economic growth and globalization is that both will eventually benefit the environment (Arrow et al. 1995). In part, this view is predicated on the nature of structural changes that are normally associated with trade liberalization and economic development. More specifically, economic growth and the shift of production away from polluting sectors and "dirty" technologies help to arrest the deterioration in the environment. In addition, environmental quality is a normal good, and wealthier economies will invest more heavily in environmental improvements and cleanup. According to this line of argument, another implication is that developing countries inevitably focus first on manufacturing production and basic forms of production while tolerating some degradation in the quality of the environment. Compounding this feature is the fact that the political pressures associated with industrialization are also likely to be influential. The factor owners employed in manufacturing industries lobby for less regulation of polluting activities. This accelerates the decay of the environment.

With the inevitable economic decline of basic manufacturing activities in more mature economies, the declining significance of basic manufacturing in industrialized countries may very well create social pressures that reduce the demand for pollution abatement. For instance, it has been argued that greater inequality of wealth and income could be bad news for the environment (see Boyce 1994; Torras and Boyce 1998). Other studies show that the pattern of sectoral resource ownership matters and that greater income inequality can yield either stricter or weaker environmental policies. For example, McAusland (2003) showed that the owners of clean factors of production may be less green voters because they may bear the burden of pollution taxes through adverse terms of trade effects on the production of "clean goods." However, in this paper, we propose the argument that associated with falling industrial wages may be declining political influence exercised by the factor owners in the polluting manufacturing industries of the economy. These latter features are likely to be manifested in the political process, that is, voting for change and a cleaner environment. In other words, structural change may not only involve less reliance being placed on the use of polluting inputs but also have the signal virtue of altering the demand for environmental policies.

More liberalized trade and the rapid onset of skill-biased technological change have been linked with the declining real incomes received by production workers in manufacturing industries. (1) Free trade raises national income which, in aggregate terms, increases the value placed on the environment. Political economic considerations are therefore likely to lead to a cleaner environment. Trade liberalization, which some authors continue to associate with increasing income inequality in Organisation for Economic Co-operation and Development (OECD) countries, may therefore be a "pro-environment" policy (see Bommer and Schulze 1999; Grossman and Krueger 1993, for instance).

Associated with this relatively sanguine view has been an empirical relationship--in the form of an inverted U-shaped curve-between per capita income and various measures of environmental degradation. The relationship, or the environmental Kuznets curve, has been investigated for a wide variety of environmental indicators (e.g., Dinda 2004, Grossman and Krueger 1995; Selden and Song 1994; Shafik 1994). For any country, the implication is that economic growth will be associated with environmental degradation until a "critical" level of per capita income is attained; from that point, there will be an improvement in environmental conditions.

Of course, the turning points in the relationship between economic growth and environmental quality can be affected by the policies implemented by decision makers (Grossman and Krueger 1995; Shafik 1994). Consequently, different political processes do not all imply that societies will grow their way out of environmental problems or that policies that promote economic growth can substitute for environmental policies.

This paper is also indirectly related to the political economy literature that deals with the effect of income inequality on redistributive policies and economic growth (e.g., Alesina and Rodrik 1994; Persson and Tabellini 1994; Saint Paul and Verdier 1996). A standard argument is that when income is more unequally distributed, the median voter is likely to be relatively less endowed with capital, either physical or human, and to thus favor a higher rate of capital taxation. A similar argument may well apply to pollution abatement policies. For instance, if the median voter is a low-income worker who receives their livelihood from supplying labor to the basic manufacturing or pollution-intensive sectors, then greater income inequality may be associated with damage to the environment because it reduces the demand for pollution abatement.