Liberalization and Growth
At a lunchtime meeting on 22 June, Gene Grossman presented
results of recent research on the environmental effects of trade
liberalization and economic growth, focusing in particular on expected
patterns of trade between Mexico and the US. Grossman is Professor of
Economics at Princeton University and a Research Fellow in CEPR's
International Trade programme. Grossman first noted environmentalists'
three main concerns over trade liberalization: it encourages growth in
developing countries with poor records of pollution control, migration
of `dirty' industries to countries with lax environmental regulations,
and relaxation of tight standards by those countries that have them in
face of increased competition. These concerns are of particular
relevance to the integration of Eastern Europe into world trade. Such
environmental damage may take effect through changes in the scale of
economic activity, changes in its composition (if pollution-generating
industries show strong growth), or changes in production techniques
(which may arise from government policies or increased competition). On
the other hand, closer trade links may induce the transfer of cleaner
techniques to developing countries, while trade liberalization that
spurs growth could stimulate their demand for a cleaner environment.
Finally, liberalization encourages countries to specialize in goods in
which they have a comparative advantage; this may prove environmentally
beneficial if developed countries concentrate on capital-intensive goods
while developing countries concentrate on labour-intensive goods.
Grossman first considered the effects of scale and technique of
production, reporting the results of using cross-country data on sulphur
dioxide and suspended particles to investigate the relationship between
economic growth and air quality. This revealed an `inverted-U'
relationship between levels of real per capita GDP and pollution for
fine suspended particulates; growth initially increases such pollution,
but beyond a turning-point at a per capita GDP of $5,000 liberalization
yields an environmental dividend; Mexico is just at this point. For
coarser suspended particles, the relationship is strictly downward
sloping. A similar exercise for water pollution indicated that levels of
heavy metal tend to level off at about $8,000 per capita, while both
lead and cadmium show steady improvements as income increases. Different
pollutants have different relationships with income, and hence with
liberalization and growth, but turning-points tend to come earlier for
those posing the most immediate health hazards to the local population.
Grossman also considered the compositional effect, reporting predictions
of which Mexican industries are likely to benefit from the
implementation of the North America Free Trade Agreement (NAFTA) through
increased exports to the US. The environmentalists' predictions that US
industries that conform to expensive pollution abatement laws or costly
labour laws and those with high tariff rates should all import heavily
are partially borne out by the data, although the pollution abatement
variable is statistically insignificant and quantitatively very small.
The relative requirements for human and physical capital in production
are far more important; on average, wages constitute 40% of costs in
manufacturing, while pollution abatement accounts for only 1.5%, and the
difference in wage rates between Mexico and the US is in any case bound
to dominate any differences in their environmental standards in
determining the trade pattern. Grossman also cited the results of
computable general equilibrium models which indicate that the output of
Mexico's public utilities including the high-pollution energy-generating
sector will fall, so air pollution should fall likewise, while its
agricultural and labour-intensive manufacturing sectors will expand.
There is an offsetting negative effect in the US, but it uses more
environmentally-friendly production techniques, so a net improvement to
the environment should result.