THESIS: There is a link between economic growth and environmental decay since as the countries operate to achieve economic growth by exploiting their economic resources, such growth leads to the deterioration and eventual decay of the environment.
- Economic growth and the environment
- Economic growth is the increase in the country’s productive capacity.
- Higher economic growth requires greater use of natural resources and environment.
- Increasing use of resources to increase productivity coupled with increasing pressure caused by increasing number of people decreases supply of natural resources and therefore, degradation of the environment.
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- Environmental Kuznets Curve (EKC) Hypothesis
- There is an inverted U-shaped relationship between the quality of the environment (more emissions means worse environmental quality) and economic growth.
- Evidence of the Inverted U-shaped relationship
- Studies on the inverted U-shaped economic growth-environmental decay relationship revealed mixed results.
- Policy Implication
- A management policy on demand efficiency with a concern on the conservation and sensible use of the environment is a better way of obtaining sustainable supply of resources.
- Conclusion
- Achieving economic growth necessitates the use of natural resources and the environment as a whole that eventually leads to depletion of resources, degradation of the environment and the eventual decay.
- A sustainable growth and development will not be achieved, however, if it will not be accompanied with cautious use of resources and protection of the environment.
Is there a relationship between economic growth and environmental decay? In this paper, I present the theory and evidences about the connection between economic growth and environmental decay. I argue that as countries operate to achieve economic growth by exploiting their economic resources, such growth leads to environmental decay.
The discussion that follows focuses on economic growth, the EKC theory, and some empirical evidences. My objective in writing this report is to present evidences that show such relationship based on the studies that were already conducted on the issue.
Economic Growth and the Environment
Economic growth can be simply defined as the increase in the country’s productive capacity. ” It is described as the steady rise in the national output of the economy that is attributable to the increase rise in the quantity of financial and human resources, quality of resources like more knowledgeable workforce, as well as technological advances that increase the value of the products produced by the economy. With this simple understanding of economic growth, the most relevant indicator commonly used is the increase in real gross domestic product or GDP. Hence, economic growth is viewed as the necessary condition for development.
Before, proponents of economic growth inspired most economies that it is the solution to the problem of underdevelopment and poverty. However, the concern at present is the observed deterioration or decay in the environment of countries that have experienced and continuously experiencing growth in their economies. According to Deirdre Kent, the attainment of “higher economic growth is necessary to achieve level of development which in turn is necessary to reduce level of poverty and improve the living standard, however, such realization requires greater use of the natural resources and environment that will eventually lead to their degradation and decay.” Also, the increasing pressure caused by the increasing number of people to the decreasing supply of natural resources further results to environmental degradation.
Environmental Kuznets Curve (EKC) Hypothesis
In 1991, Grossman and Krueger suggested that pollution emission as an indicator for the quality of the environment, that is, more emissions implies worsening quality of the environmental, follows an inverse U-shaped pattern as the economy grew over time. This relationship is the Environmental Kuznets Curve or EKC hypothesis. This hypothesis is depicted in a chart, which gives a statistical summary of the significant aspects of collective human acivity in two-dimensional space. The EKC hypothesis reveals how a technically specified measurement of environmental quality changes (e.g., concentration of sulfur emissions) as the fortunes of a nation changes (e.g., per capita income) across time.
Grossman and Krueger proposition is that there is a systematic relationship between changes in income and the quality of the environment. They maintained that the rise in income from trading could be the means to have a stricter control on the use of the environment. What they found in the findings of their study was that pollution tends to increase (high levels of smoke and sulfur dioxide suspended in the air) with per capita gross domestic product at low national income levels and tends to decrease with per capita GDP at high national income levels. Moreover, the authors revealed that as development is achieved by country, there would come a point where in the quality of life get worse, but would eventually pick up and improve. As implied in the hypothesis, in agrarian economies as well as pre-industrial economies that are characterized by subsistence economic activities, the conditions of the environment is not affected by the activities in the economy in term of pollutants that are present in industrialized economies. As economic development sets in and industrialization progresses in these economies, the excessive use of the natural resources, use of environmentally destructing technologies, more emission of pollutants, and policies that prioritize increases in national output without giving regard to sustaining the natural resources and the environment, the decay or deterioration of the environment is very much expected. But, this negative implication of growth would then be reversed as the economies continually grows in which the impact is channeled through development in the economy (economic development) that is characterized by increase in life expectancy, cleaner habitat, improved air quality and cleaner water. As the economies move toward post-industrial stage of development, environment friendly technologies would be adopted and the people are more willing to improve the quality of the environment.
Nevertheless, the concern at present is that “economic growth has brought us environmental degradation, global warming, social decay and an increasing poverty gap.”
What the Data are Telling Us?
Studies on the inverted U-shaped economic growth-environment decay relationship revealed mixed results. Some authors find evidence of EKC hypothesis using country data while others show that the relationship is not strong if some modifications and/or specifications are made with the econometric model. Also, there are theoretical evidences nonetheless these were not yet tested empirically.
Surveys conducted by Dinda (2004), Copeland and Taylor (2004), and Dasputa, laplante, Wang and Wheeler (2002) showed evidence of the inverted U-shaped relationship between economic growth and environmental decay. They have proven that as the income of economies increases, pollution levels also increases. An earlier study by Shafik in 1994 revealed similar result; also, a theoretical model that shows the inverted U-shaped relationship exists between pollution and income was derived by Lopez (1994). Moreover, in 1995 Panayotou provided a detailed explanation revealing the said relationship. Munasinghe in 1999 presented a theoretical model and empirical case study. Using marginal benefits and marginal costs of reduction in pollution, Munasinghe showed that during the initial phase of economic development, the perceived marginal benefits of protecting the environment are very small to convince the policy makers to take decisions that will forgo the additional benefits that can be obtained from economic growth.
Meanwhile in 1995, Antle and Heidebrink formulated the environmental transition hypothesis which showed the economic development and environment trade off. According to these authors, once people have achieved or reached, the eventually demand for better quality environment, however with the assumption that resources (inputs of environmental quality) like air and water quality have no price, and are therefore free and should be treated as open or common access resources. Antle and Heidebrink concluded in their study that environmental degradation is likely to accompany economic growth at low levels of income. However, as economy’s income rises, there would then be the increase in the demand for the protection of the environment thereby resulting to an economy that exhibits both economic growth and improvement in the quality of the environment. Dwelling on the idea of property rights, the authors build a model wherein market and environmental goods are priced. They showed that in the early phase of economic development, environmental good tend to have low price but are abusively used. With the continued use of this resource leading to its scarcity, the price of the environmental goods tends to rise. The decreasing supply of environmental quality (and therefore deterioration) that led to its rising prices then results to concerns about protecting this capital and signals for making it sustainable and eventually improvement. It was not however, explicitly recognized by the authors if the emergence of markets or the establishment of property rights were the means of attaining such improvement. This result simply implies that one of the features of the EKC hypothesis is the possibility that environmental quality tends to become a luxury good at higher income levels. That is to say, the income elasticity of demand for the quality of the environment tend to vary across income levels. Specifically, the income elasticity of demand is greater than one at the threshold wherein the increase in income results to improvement of the environment. Nevertheless, this requires the establishment of property rights for the environment to be improved or preserved.
Meanwhile, Burnett’s findings revealed mixed results. A statistically significant U-shaped relationship for some of the pollutants was evident, but such relationship was weak. Also, his study had not found evidence to support the traditional EKC inverse relationship.
So what could be the solution?
A possible solution for increasing the supply of environmental resource is the establishment of management policy that necessitates the efficiency of using the resource with emphasis on its conservation and sensible utilization. This can be done by implementing policies that encourages and obliged the communities to manage the resources. However, this will require the existence of property rights assigned to the community, as well as the participation of the people especially the women and authorized institutions to impose the rights. Moreover, this in turn necessitates the participation of a pro-environment government that can actively engage and commit in a participatory system of environmental management and conservation.
Further, in terms of pricing the environmental goods, adjustment in prices can be done through taxes and subsidies. This will make the environmental goods like green industries and renewable energy sources to be more competitive.
Conclusion
Achieving economic growth necessitates the use of natural resources and the environment as a whole that eventually leads to depletion of resources, degradation of the environment and the eventual decay. A sustainable growth and development will not be achieved, however, if it will not be accompanied with cautious use of resources and protection of the environment.
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