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Prosperity and Environment

By Matthew Brown and Jane S. Shaw

Deforestation, lack of safe drinking water, oppressive air pollution-these environmental ills are found frequently in Third World nations but rarely in developed ones. Even so, economic growth is still often portrayed as the cause of many (if not most) environmental problems.

The economic literature has begun to address the connection between economic growth and environmental progress, revealing that it is often a positive one. This article brings together key evidence in hope of encouraging more dialogue on the subject.

The research attracting the most attention was conducted by Princeton economists Gene M. Grossman and Alan B. Krueger (1995). They compared income levels with measures of air and water quality, describing the relationship they found as an "inverted-U": As poor economies begin to expand, they at first experience deteriorating environmental quality. But, after a certain point, as wealth increases, environmental quality improves as well.

For example, Grossman and Krueger found that smoke (light particulates) tends to increase in urban air until countries reach a per-person income of about $9,000 per year (in 1998 dollars). Then, as incomes rise further, smoke declines. Grossman and Krueger (1995, 353) concluded that "economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement."

Although the inverted-U does not hold perfectly for all measures of pollution, Grossman and Krueger (1995, 370) were unambiguous in concluding that "contrary to the alarmist cries of some environmental groups, we find no evidence that economic growth does unavoidable harm to the natural habitat." At the same time, they did not conclude that economic growth was a panacea for environmental quality, as some of their critics later implied.(1)

The Grossman and Krueger paper was attacked, indirectly but clearly, by a group including Nobel laureate economist Kenneth Arrow in Science. Arrow et al. (1995) conceded the validity of the Grossman and Krueger findings, but they sought to narrow the implications. The inverted-U curve "has been shown to be valid for pollutants involving local shortterm costs (for example, sulfur, particulates, and fecal coliforms)," they wrote, "not for the accumulation of stocks of waste or for pollutants involving long-term and more dispersed costs (such as CO2), which are often increasing functions of income" (Arrow et al. 1995, 520). The critics also expressed doubt that the curve applies to "resource stocks" where "the feedback effects of resource stocks are significant, such as those involving soil and its cover, forests, and other ecosystems" (Grossman and Krueger 1995, 520).

The journal Ecological Economics, edited by Robert Costanza (one of the Science article authors), dedicated two issues (1995 and 1998) to elaborating on the response that appeared in Science and, more generally, on the relationship between economic growth and environmental quality. Many of the contributors thought that Arrow et al. had been too soft. "They should have said clearly that the general proposition that economic growth is good for the environment is false and pernicious nonsense," wrote one (Ayres 1995, 97) [italics in original].

The claim of Arrow et al. that the inverted-U does not apply to "resource stocks" is challenged by at least one paper. John M. Antle and Gregg Heidebrink compared national income levels with two measures of environmental quality, the total area of land protected or preserved within a country and the rate of deforestation. They found that increased wealth alone leads to greater environmental protection of forests, beginning at income levels around $3,000 per person (in 1998 dollars) (Antle and Heidebrink 1995, 619). Once this income level is reached, countries begin to see afforestation (an increase in forested lands) and an increase in the area of land that is protected by the government.

More broadly, a number of economists have assembled environmental data suggesting that economic growth is friendly to the environment.2 William J. Baumol and Wallace E. Oates (1995) may have initiated this research on environmental trends in an essay first published in 1979. Their data included information from the remote past, such as a law against air pollution in London in 1300, but they concentrated primarily on the period between 1940 and 1975. Looking at such measures as pollution of the Great Lakes and air pollution in New York City, they found that "the trends in environmental quality run the gamut from steady deterioration to spectacular improvement" (Baumol and Oates 1995, 444).

Baumol and Oates were surprised by so many favorable findings. They had assumed the opposite. At the very least, their findings undermine the assumption that economic growth must cause environmental deterioration. Their essay is especially interesting because most of their data precede the decades of heavy investment in pollution cleanup that began around 1970.

University of Chicago economist Don Coursey (1992) took a different tack in his effort to understand the connection between economic growth and environmental quality. He looked at historical trends with the goal of identifying the income elasticity of the demand for environmental quality. If the demand for environmental quality is positive and highly elastic, he reasoned, then environmental quality is a "luxury good." Demand for it will rise faster than income.

Coursey correlated income levels in the United States with Gallup opinion polls taken in the United States between 1940 and 1990 and with federal environmental legislation. He found that as income levels went up, concern about the environment increased. He concluded that the demand for environmental quality has an income elasticity of 2.5, similar to the demand for new cars and private education.

Economist Seth Norton (1998) of Wheaton College has studied the relationship between nations’ rates of growth not their income levels) and environmental quality. Norton defines high-growth countries as those with annual rates of growth of over 4.5 percent and lowgrowth countries as those with growth rates under 1 percent. Norton found that high growth is correlated with environmental benefits. For example, he found that over 84 percent of people in high-growth countries had access to safe drinking water, while only 53 percent in low-growth countries did. Eighty-three percent of the people in high-growth countries had access to proper sanitation while only 40 percent did in low growth countries. Life expectancy was 63 years in high-growth countries but only 50 years in low-growth countries.

When Norton (1998) again compared high- and low-growth countries but limited his analysis to countries with per capita incomes below $7,500 (in 1998 dollars), he found similar results. Sixty-eight percent of people in low-income countries that had high rates of growth enjoyed access to safe drinking water, while only 48 percent of those in low-growth, low-income countries did. Sixty-two percent in poor high-growth countries had access to sanitation while only 35 percent did in poor low growth countries (see chart). So, while economic growth may increase some types of pollution initially, as Grossman and Krueger found, Norton’s analysis suggests that some characteristics of rapid-growth low-income countries help offset the initial decrease in environmental quality.

Norton’s analysis also suggests that property rights are an important determinant of environmental quality. Using new indices such as the Economic Freedom of the World (Gwartney, Lawson, and Block 1996), Norton found that in countries where property rights are well protected, much higher percentages of the people have access to safe drinking water and sewage treatment. Norton proposes that well-defined and protected property rights lead to increased economic growth, which in turn leads to better environmental quality.

Property rights may have a direct connection to environmental protection. Extensive work by Robert Deacon (1994 and 1995) links deforestation with political instability and poor protection of property rights. The introduction of the role of property rights helps fill a gap in the current literature: the reasons behind the apparent link between increased wealth and environmental quality. Arrow et al. (1995, 521), also recognized that "the lack of well-defined property rights" deters environmental protection, but did not propose ways to define and enforce them.

Property rights and their incentives may explain the connection, but it is also possible that political forces organized by an increasingly wealthy population lead to regulations that improve environmental quality. Perhaps it is some combination of both.

Another source of controversy stems from different views of what environmental quality is. If environmental quality is defined by its effect on the human condition, then life expectancy and sewage treatment are good measures, as is air pollution. In contrast, using the preservation of endangered species or the extent of forests as a leading measure assumes a definition of environmental quality somewhat removed from direct impact on humans. Along the same lines, is environmental change inherently a measure of deterioration? Since the environment has changed naturally over eons, perhaps human-caused change is not a problem, as long as we have the wealth and knowledge to adjust to it. The research mentioned in this paper is a good first step to answering these questions, but many questions remain.

1. The inverted-U is sometimes called the "environmental Kuznets curve" because it resembles the Kuznets curve, which shows the relationship between economic growth and income inequality. 2. See, for example, Goklany (1998); Selden and Song (1994).


Antle, John M., and Gregg Heidebrink. 1995. Environment and Development: Theory and International Evidence. Economic Development and Cultural Change 43(3): 603—25.

Arrow, Kenneth, Bert Bolin, Robert Costanza, Partha Dasgupta, Carl Folke, C. S. Holling, Bengt-Owe Jansson, Simon Levin, Karl-Gšran MŠler, Charles Perrings, David Pimentel. 1995. Economic Growth, Carrying Capacity, and the Environment. Science 268(April 28): 520—21.

Ayres, Robert U. 1995. Economic Growth: Politically Necessary but Not Environmentally Friendly. Ecological Economics 15(2): 97—99.

Baumol, William J., and Wallace E. Oates. 1995. Long- Run Trends in Environmental Quality. In The State of Humanity, ed. Julian L Simon. Cambridge MA: Blackwell Publishers, 444—75.

Coursey, Don. 1992. The Demand for Environmental Quality. John M. Olin School of Business, Washington University, St. Louis, MO, December.

Deacon, Robert. 1994. Deforestation and the Rule of Law in a Cross-Section of Countries. Land Economics (November): 414—30.

—. 1995. Assessing the Relationship between Government Policy and Deforestation. Journal of Environmental Economics and Management 28(January): 1—18.

Goklany, Indur M. 1998. Do We Need the Federal Government to Protect Air Quality? Policy Study 150. St. Louis, MO: Center for the Study of American Business, December.

Grossman, Gene M., and Alan B. Krueger. 1995. Economic Growth and the Environment. Quarterly Journal of Economics 110(2): 353—77.

Gwartney, James D., Robert Lawson, and Walter Block. 1996. Economic Freedom of the World, 1975-1995. Vancouver, BC, Canada: Fraser Institute.

Norton, Seth W. 1998. Property Rights, the Environment, and Economic Well-Being. In Who Owns the Environment? ed. Peter J. Hill and Roger E. Meiners. Lanham, MD: Rowman and Littlefield Publishers, 37—54.

Selden, Thomas M., and Daqing Song. 1994. Environmental Quality and Development: Is There a Kuznets Curve for Air Pollution? Journal of Environmental Economics and Management 27: 147—62.

Matthew Brown, a PERC Research Assistant, is a statistics graduate student in the mathematical sciences department of Montana State University. Jane S. Shaw is a PERC Senior Associate.

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