For many, economic growth and environmental protection exist in direct tension. People with this belief generate policy proposals to permit growth while protecting the environment. For others, the tension is irremediable — they believe growth necessarily destroys. For these zealots, degrowth is the only way. For both groups, liberalizing the economy — allowing for more economic growth — carries at least a risk of environmental degradation.
In recent work with Justin Callais and Alicia Plemmons, published in Structural Change and Economic Dynamics, we show that there is no reason to worry. We used 49 cases of sustained economic liberalization since 1970 and measured their effects on outcomes such as death rates from air pollution, total greenhouse gas emissions, as well as emissions per capita and per dollar of economic output. In this context, liberalization refers to the adoption of policies that promote international trade, secure property rights, and lessen fiscal and regulatory burdens.
Comparing with similar countries that did not liberalize, we found that while GDP per capita increased 16 percent within ten years for liberalizers, environmental outcomes did not deteriorate. In fact, we found that death rates from air pollution declined modestly, while there were no effects of liberalization on total greenhouse emissions. Moreover, post-2000 liberalizers actually showed signs of lower emissions per dollar of economic activity and capita.
In other words, pro-growth policies are not in tension with environmental preservation. Why would that be the case? In short, the policies themselves help the environment.
One way economic activity affects nature is through the channel most people have in mind when they argue that economic growth harms the environment: scale. As economic activity expands, the use of resources and the production of waste can increase as well. More economic activity means more pollution. However, three other forces work in the background to counteract this effect. The first is that we also tend to substitute across sectors of economic activity as we grow. Nations move from industrial sectors to service sectors. The second is through the role of innovation. Economic growth requires productivity growth, and that only comes from using fewer resources (energy, water, natural resources, labor, capital) to generate more value for consumers. As a result, technologies also mitigate the scaling-up effect. The third is that, as people grow richer, they are willing to pay more for “environmental” goods and services, including investing in efforts to restore and preserve nature.
Together these factors give rise to what is known as the Environmental Kuznets Curve (EKC), named in honor of Simon Kuznets — a Nobel laureate in economics. It posits a relatively simple relationship whereby environmental degradation initially rises as economies grow and industrialize, but eventually declines once societies become wealthier. As incomes increase, demand for environmental quality rises while technological innovation reduces pollution intensity.
But here is the kicker that explains exactly why we should want liberalization to get both growth and environmental improvements: the shape of the curve depends on the institutions that generate economic growth. Growth achieved under secure property rights, open markets, limited regulatory burdens and the rule of law tends to reach the turning point sooner and at lower levels of pollution. In other words, the peak of the EKC happens at a lower income and at a lower level of degradation. Moving towards such institutions is what liberalization is!
That lower and earlier peak occurs because markets are not lawless without government regulations or interventions. Secure property rights end up dealing with problems of nuisance (such as air or water pollution), trespass, negligence (think oil spills), and create liability. Enforcement of property rights gives rise to non-legislative forces that push individuals and firms to internalize the costs of pollution they impose on others. Those who are injured (or whose properties are damaged) by pollution, contamination, or other hazards seek compensation or injunctions, forcing polluters to internalize costs that would otherwise be shifted onto third parties. Anticipating liabilities (either through suits or through insurance premiums being increased), polluters adjust before lawyers get involved. The process is also highly decentralized and lends itself to experimentation (on a case-by-case basis) such that it is thus far more effective than command-and-control regulations that mandate or prohibit certain behaviors.
The security of property rights also generates incentives to innovate. Inventors and entrepreneurs — since they can safely appropriate the gains of their efforts — are motivated by the lure of profits to develop and deploy new technologies that use fewer resources. Moreover, open markets allow prices to convey information about the scarcity of resources and signal the need for conservation and/or encourage the search for substitutes. Consumers can also signal their discontent with environmental quality of goods and threaten firms with their wallets in ways that force the latter to adjust their practices. Finally, open markets mean that production can specialize where it is most effective such that we use less land, less energy, and fewer resources for the same output.
In other words, economic liberalization has a virtue that many overlook: incentive alignment! It aligns the pursuit of self-interest by investors, entrepreneurs, workers, and consumers with environmental preservation. To be sure, the alignment is not perfect. Some regulations or environmental policies might play a complementary role. But the incentive alignment is a strong force explaining why there is a strong relationship between economic freedom (a proxy for the degree of economic liberalization) and environmental preservation. It is that very alignment that causes the EKC to peak at a lower and earlier point.
Preservation or growth is a false choice. The same institutions that generate prosperity (property rights, open markets, and economic freedom) also encourage innovation, conservation, and better environmental outcomes. We should want more of them. We should want, for the sake of the environment, more liberalization!
