Is Globalization Causing A 'Race To The Bottom' In Environmental Standards? (Part 4 of a four part series) If globalization promotes growth, won't that mean more environmental degradation? Some critics argue that since increased trade and foreign direct investment stimulate higher growth in developing countries, this must lead to more industrial pollution and environmental degradation. Some pollutants such as acid emissions or particulate matter are empirically observed to have an 'inverted U curve' relation with income: pollution first rises as countries advance from low to middle level incomes, before falling again as countries attain high incomes. Is pollution an inevitable price for economic development? It should be noted in passing that this is an argument against economic growth in general, rather than against globalization specifically. Is it true, however, that growth in developing countries must necessarily be accompanied by severe environmental degradation? Recent evidence suggests a more subtle and complex relationship between economic development and environmental protection. Empirical observation of an 'inverted U' in some instances says little about the environmental policies underlying the observation, or the potential for better policies to 'flatten' or eliminate it. Thus it is striking that many developing countries have already turned or are turning the corner in the fight against pollution at much lower levels of income than the rich countries did in their day. A 1998 World Bank study of organic water pollution found that pollution intensity fell by 90 per cent as per capita income rose from $500 to $20,000, with the fastest decline occurring before the country reached middle income status (Figure 6. Hettige, Mani and Wheeler, 1998). Average air quality in China has stabilized or improved since the mid- 1980s in monitored cities, especially large ones - the same period during which China has experienced both rapid economic growth and increased openness to trade and investment. It seems there is no hard and fast rule that a certain level of development will be associated with a certain level of pollution. Much depends on the environmental policies countries pursue. Indeed, many developing countries appear to have found that the benefits of pollution control outweigh the costs and are adopting innovative, low-cost strategies to limit pollution while also expanding economic growth. For example, new pilot projects based on public disclosure of information about factory pollution have had significant success in reducing pollution in Indonesia and the Philippines. Moreover, openness to trade and investment can provide developing countries with both the incentive to adopt, and the access to, new technologies, which may provide a cleaner or greener way of producing the good concerned. For example, much foreign investment is for export markets. The quality requirements in those markets encourage use of the latest technology, which is typically cleaner than old technologies. A World Bank study of steel production in 50 countries found that open economies led closed economies in the adoption of cleaner technologies by wide margins, resulting in the open economies being 17 percent less pollution-intensive in this sector than closed economies (Wheeler, Huq and Martin 1993). This discussion suggests that developing countries may be able to achieve high levels of economic growth and high levels of environmental performance long before they reach the income levels of the industrialized countries. This is not to say that there are no tradeoffs between growth and the environment. Even with good environmental policies and clean technologies, continued increases in output may tend to increase the total volumes of various kinds of pollutants in many cases. Every society has to decide for itself on the relative value it places on economic output and the environment. The point about international openness, though, is that in general it appears to make this tradeoff less painful for developing countries, allowing more environmental protection for the same amount of growth, or more growth for the same amount of environmental protection. Will liberalization devastate sensitive environmental sectors? A second related concern is that trade and investment liberalization in environmentally- sensitive sectors such as forestry and fishing will exacerbate existing overuse of resources. Over-use of a natural resource may occur when there is a policy regime of open access and the overall costs to society of its use are not fully reflected in the price paid by private users (for example individual fishermen do not consider the impact of their activities on global fishing stocks). Opening the activity to international trade and investment may then exacerbate the irreversible loss of environmental resources. An important question here is that if one's concern is to protect a scarce environmental resource then why tax or regulate only international trade in the product? In the ideal case, taxing or regulating both international and domestic trade in the product without discrimination will usually be a more efficient or effective way of protecting it. Often, however, developing countries do not have the institutional capacity to put in place these more ideal, non-discriminatory environmental protection policies. In some cases, then, not opening the sector for the time being may turn out to be the only realistic 'second-best' policy, while the institutional and regulatory capacity for better quality environmental protection is built up. Will competition for investment cause developing countries to become 'pollution havens'? Another concern relates less to environmental outcomes and more to environmental regulation. It is argued that increased international competition for investment will cause countries to lower environmental regulations (or to retain poor ones), a "race to the bottom" in environmental standards as countries fight to attract foreign capital and keep domestic investment at home. However there is no evidence that the cost of environmental protection has ever been the determining factor in foreign investment decisions. Factors such as labor and raw material costs, transparent regulation and protection of property rights are likely to be much more important, even for polluting industries. Indeed, foreign-owned plants in developing countries, precisely the ones that according to the theory would be most attracted by low standards, tend to be less polluting than indigenous plants in the same industry. Most multinational companies adopt near-uniform standards globally, often well above the local government-set standards (Dowell, Hart and Yeung 2000; Schot and Fischer 1993). This suggests that they relocate plants to developing countries for reasons other than low environmental standards. Paradoxically, the pollution haven effect may be more important within the national boundaries of a developed country than between rich and poor countries. Within a national boundary many of the other locational factors are less important, and so local environmental regulations might matter more. (Globalization, Growth, and Poverty, World Bank, 2001) In East Asia in the 1970s, . the fast growing "Tigers" (Korea, Taiwan (China), Singapore and Hong Kong) began to export more of certain highly polluting sectors, while Japan began to reduce its exports in these sectors. However, this trend diminished in the 1980s, and a stable pattern emerged with the Tigers importing somewhat more than they export in the highly-polluting sectors. A similar pattern occurred in trade of polluting sector products between North America and Latin America. In China the share of the five dirtiest industries in total industrial output has fallen, while imports of pollution intensive products have actually increased. (World Bank, 1997). Two recent empirical studies (Wheeler 2001; Jaffe and others 1995) do not find that countries have lowered their standards to attract foreign investment or to increase exports. Wheeler analyzes data on air quality in the industrial heartlands of three major new globalizing countries; Brazil, China and Mexico. He finds that far from experiencing a race to the bottom, all three have registered improvements in air quality. Countries do not become permanent pollution havens because along with increases in income come increased demands for environmental quality and a better institutional capacity to supply environmental regulation. One World Bank study of 145 countries identified a strong positive correlation between income levels and the strictness of environmental regulation (Figure 7. Dasgupta, Mody, Roy and Wheeler, 1995). Indeed the so-called "California Effect" in the US demonstrates that there is nothing inevitable about a 'race to the bottom.' After the passage of the US 1970 Clean Air Act Amendments, California repeatedly adopted stricter emissions standards than other US states. Instead of a flight of investment and jobs from California, however, other states began adopting similar, tougher emissions standards. A self-reinforcing "race to the top" was thus put in place in which California helped lift standards throughout the US. Vogel (1995) attributes this largely to the "lure of green markets" - car manufacturers were willing to meet California's higher standards to avoid losing such a large market and once they had met the standard in one state, they could easily meet it in every state. Openness and environment friendly policies It seems