British Academy: The UK's National Academy for the Humanities and Social Sciences
Partha Dasgupta: 'The Economics of the Environment'
Copyright © The British Academy, 1996
Printed in Proceedings of the British Academy, Volume 90, pp. 165-221
8. Trade and the Environment
Thus far national economic policy. But even in areas where the environment is beginning to impinge on international economic policy, as in GATT and NAFTA, [note 20 (go to Notes)] it has remained a tangential concern, and the presumption has often been made that the liberalisation of international trade is, in some sense, good for the environment. This notion has meant that policy reforms designed to promote trade liberalisation have been encouraged with little regard to their environmental consequences; presumably, on grounds that these consequences would either take care of themselves or could be dealt with separately. [note 21]
As a reaction to this, I would imagine, it has not been uncommon to view international trade liberalisation as a harbinger of a deteriorating environment (e.g. Daly, 1994). When stated so baldly, the view is false: it doesn't recognise the heterogeneity of environmental problems; it doesn't distinguish between the volume and composition effects of a growth in trade on the world's production of goods and services; it doesn't say if the growth is allied to international agreements on transfrontier pollution and a reduction in domestic market failure; and it is silent on whether the growth is brought about by a removal of government-induced distortions. To be sure, increased world trade is often associated with a relocation of production units in accordance with relative international labour, capital, and resource costs. One would expect free trade to shift polluting industries to poor countries (Copeland and Taylor, 1994), but insofar as the resulting pollution is local, this is a matter of national sovereignty. The argument that lobbies would succeed in lowering environmental standards in countries that have high standards, in order to meet competition from countries with low standards, is not dissimilar to the concern people have that trade with low-wage countries would eventually lower wages in high-wage countries. However, it is possible to design tax-subsidy schemes to offset the additional cost of higher standards while retaining some of the gains from trade. [note 22] Above all, the argument for trade protection arising from the thought that countries with lower environmental standards will become sinks for other countries' pollutants is to be resisted because of the kinds of considerations that were outlined earlier in this lecture.
A variant of these economic considerations formed the intellectual background of an argument in a widely-publicised memorandum issued in 1991 by the Chief Economist of the World Bank to his staff for discussion. It suggested that trade in pollutants should be encouraged between rich and poor nations because of at least two reasons: (i) poor countries (e.g. sub-Saharan Africa) suffer from lower industrial pollution than those in the West; and (ii) being poor, they could be expected to value environmental quality less at the margin.
The memorandum was much criticised in the international press, mostly along the lines that it read altogether too much like saying, "let the poor eat pollution". The arguments I have offered in this lecture imply that this is misplaced criticism. On the other hand, there are two reasons why we should be wary of the suggestion. First, it is based implicitly on the thought that there are no significant threshold effects associated with environmental pollution. If thresholds were important, it would not make sense to spread pollution evenly across geographical locations. Within municipalities, for example, household and industrial waste are typically deposited in rubbish dumps. This is a social response to the presence of environmental thresholds. We may now enlarge on this observation: assuming that it is true that poor countries currently enjoy a better environment as regards industrial waste, it could well be that global well-being would be enhanced if their environment were protected and promoted, and if selected sites in rich countries were used as global centres of deposits for industrial effluents.
The second reason one should be circumspect about the suggestion is that it doesn't note that the poor in poor countries are not the same as poor countries. There are both rich and poor people in poor countries. Typically, the rich in these countries don't absorb anything like the environmental risks the poor are forced to accept (e.g. health risks at work). In addition, the rich enjoy political advantages. Furthermore, there is nothing resembling a free press, nor open debate, in a majority of poor countries. It is then all too possible to imagine that if trade in industrial pollutants were to be encouraged, the poor in poor countries would be made to absorb the health risks (industrial pollutants are usually spatially localised), and the rich in poor countries would grasp the income accruing from the trade (a private benefit). This should make for a difference in our attitude towards the proposal. As elsewhere in economics, the issue of governance lies somewhere at the heart of the matter.
More: 9, Valuing Environmental Resources
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