Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

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. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Tuesday, June 21, 2005

Do Low-Income Countries Have a Comparative Advantage in Producing Pollution?

Harvard President, Larry Summers, is reputed to have once opined that

Just between you and me shouldn't the World Bank be encouraging more migration of the dirty industries to the LDCs [least developed countries]?

I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.... I've always thought that underpopulated countries in Africa are vastly underpolluted; their air quality is vastly inefficiently low compared to Los Angeles or Mexico City."

Even though later evidence indicated that Summers did not write that memo, it caused quite a stir.

There is now evidence [presented by Matthew E. Kahn and Yutaka Yoshino (2004) "Testing for Pollution Havens Inside and Outside of Regional Trading Blocs", Advances in Economic Analysis & Policy: Vol. 4: No. 2, Article 4. (registration required)] that in fact poorer countries do produce and export more from dirty industries, and that as incomes rise, countries migrate from emphasizing dirty industries to emphasizing cleaner ones.

Using bilateral trade data over the years 1980 to 1997 for 128 nations for 34 manufacturing industries, we document that low-, middle-, and high-income nations differ with respect to their income elasticity in exporting dirty goods. Outside of RTA [Regional Trade Agreement] blocs, we find general support for the pollution haven hypothesis. As a nation’s income rises, its exports of dirty goods decrease relative to its exports of clean goods. When we compare, low-income, middle-income and high-income nations, we find that middle-income nations have the largest dirty trade income elasticity.
Whether it was World Bank policy probably doesn't matter: if there is, indeed, a positive income elasticity of demand for cleaner air, we would expect this result just from the machinations of the market.

Interestingly, the negative correlation between country income and dirty industries does not appear to be the result of foreign direct investment by multi-national firms [see Beata Smarzynska Javorcik and Shang-Jin Wei (2004) "Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?", Contributions to Economic Analysis & Policy: Vol. 3: No. 2, Article 8. There is a series of papers on this topic at B.E.Press].
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