The Economics of Pollution Havens - Essay Example

?The advent of modern society and industrialization has brought about many advantages regarding raising living standards, providing jobs to the masses and decreasing poverty rates compared to the historical agrarian society of the past. Although it has been argued that modern society has spurned a lot of positive changes to many countries, many of these jobs in manufacturing, production, and other low-skilled jobs are not paying enough to provide an adequate living wage, but regardless it has provided millions of families with their only means of reliable income which was not available to them before. Many researchers and academics have hypothesized that the advent accelerated and competitive economic globalization, trade barriers liberalization such as ”free trade agreements” and industrialization have created what they call “pollution havens” in many countries and communities. The pollution haven hypothesis states that pollution heavy industries will relocate to jurisdictions with less stringent environmental regulations as a strategy to further reduce production costs (Mrwhatis, 2011). The validity of the “pollution haven” hypothesis has been a long debated one between academics and policy researchers. Early research theory works of Pethig (1976) and McGuire (1982) first presented the theory that in case of increased environmental regulations in the home country would lead to increased plant relocation to countries with less stringent environmental regulations as long as free trade agreements or trade liberalization allowed it (Webmeets, 2012). Regardless of the enormous amount of research and empirical studies on the subject, it has not settled the debate one way or the other. Under one version of the “Pollution Haven” hypothesis it is believed that less developed countries value economic growth more than protecting the environment and natural resources, therefore their operating standards for environmental protection tend to be extremely lax to almost non-existent. As a direct consequence, these jurisdictions with low environmental protection regulations will tend to concentrate pollution heavy industries and create localized pollution havens. Although the negative environmental impact and general welfare for these communities can be significant, the positive economic impacts brought by the new jobs far outweigh the negative consequences. According to Grossman and Krueger (1993) and Jaffe (1995) there is not considerable evidence supporting the existence of pollution havens as a direct result of factor endowment and economies of scale considerations. They argue that free trade by itself might not harm the environment, but more likely a result of various factors. Antweiler et al.(2001) and Grossman and Krueger (1993) state that information asymmetry related created when the government regulators do not measure the actual production level nor means of production technology to derive actual pollution derived from the company itself as one of the key factors. Other causes such as aggregate demand for the polluting product, a technique effect (polluting intensity due to operational factors intrinsic to the industry), and the actual share of revenues derived from the polluting industries versus the total GDP of the host country are the most important factors in determining the actual causes of pollution for these industries. The research performed by Antweiler demonstrated that the technique effect played the most important role in determining environmental regulations due to the imperfect information effect rather than lower cost of capital (Wu, 2004). It is worth mentioning that the debate regarding the re-localization of labor intensive polluting industries really started to take hold in the 1980's where industries such as the apparel industry started transferring operations to places like Mexico and later the trend followed in the 1990's with China becoming the low-cost manufacturing hub of the world. Many heavy polluting industries are not able to transfer operations to many places where environmental regulations are lax. There is other much more important and significant natural barriers of entry to many of these pollution heavy industries (Grether & Melo, 2003). Some of the most important challenges of modern industrial society are related to managing sensible environmental regulation policies, mitigating the negative effects to our natural environment such as deforestation, modern industrial agriculture, preventing contamination of water sources and the overall aggregate effect of environmental pollution derived from manufacturing, agriculture and industrial processes (Fullerton, 2013). Although past empirical research has been affected by the difficulties measuring the effect of regulatory stringency and pollution, newer studies that use strata or categories of data to separate and control the effects of instrumental variables or unobserved heterogeneity have found statistically significant correlations (Georgetown). For example more recent empirical studies by Edrington (2005) and Cole (2010) call for a more differentiated empirical approach by focusing and stressing the importance of looking at imports in developing countries and exports to more developed markets (Batacrova, 2011). Concentrating on studying the most polluting sectors of the economy instead of focusing on a heterogeneous approach of looking at the effect of total aggregate trade flows provide a more accurate picture as to the impact of specific industries in the environment and where pollution is really coming from. In many societies although overall poverty rates have decreased, the negative environmental consequences and pollution directly associated with urbanization, industrialization and the increased population concentration associated with urban population growth have been a challenge that must be adequately addressed. The latest researchers have found that by looking at a variety of causal factors provide a more accurate view of the causes for pollution in the industrial sector and moving away from aggregate capital flows and focusing specifically on the “dirty” industries and how goods flow into and from their countries of origin to their destination markets. In companies that are subject to high levels of industry competition, introduction of environmental regulations will likely have a higher impact in the cost of production and will be more likely utilize foreign production and import materials from countries with lower environmental regulations due to lower overall costs. On the other hand in more concentrated industries, where few firms hold the power, it is more likely that these companies will be able to transfer any additional costs to the consumer due to their level of control, market power, and lack of meaningful competition therefore might be less willing to resort to importing goods or services. These latest findings are particularly interesting and meaningful to policy makers since following new introduction of environmental regulations should focus their efforts on concentrating their industry base, while minimizing the negative effects of increased centralization of power regarding higher consumer pricing and a decrease in innovation. An example of a country that is a pollution haven due to its low environmental regulation is China. This might help China in the short run, but in the long run it will have devastating consequences on the natural environment of the country. Environmental degradation is so severe in China that pollution poses not only a major long-term burden on the Chinese public but also an acute political challenge to the ruling Communist Party (Kahn, Yardley, 2007). In the United States the government has delegated the role of protecting the environment to the Environmental Protection Agency (EPA). The mission of EPA is to protect human health and to safeguard the natural environment — air, water, and land — upon which life depends (Propertyrightsresearch). Pollution havens do not occur in the United States because the EPA monitors violation of its environmental laws closely. One of the leading causes of the worldwide pollution problem is the way energy is being produced by our society. Fossil fuels are the main source that is being used to create electricity and fuel for the over one billion vehicles worldwide. A way for countries to lower the emissions created by vehicles is by imposing harsher regulation on new vehicles. A potential long term solution is to prohibit the sale of fuel engines to move towards electric base vehicles. In pollution haven states the low environmental regulations are accelerating the pace of deterioration of the ozone layer. Another consequence of higher air pollution is global warming. References Batacrova, S. (2011). Flip side of pollution haven: do export destinations matter? [Accessed 26 April 2013] Fullerton, D. (2013). The Economics of Pollution Havens. [Accessed 26 April 2013] Georgetown.com. Pollution haven hypothesis. < http://www9.georgetown.edu/.../aml6/pdfs&zips/pollutionhavens.pdf> [Accessed 26 April 2013] Grether, J.M., Melo, J. (2003). Globalization and dirty industries: Do pollution havens matter? [Accessed 26 April 2013] Kahn, J., Yardley, J. (2007). As China Roars, Pollution Reaches Deadly Extremes. The New York Times < http://www.nytimes.com/2007/08/26/world/asia/26china.html?pagewanted=all&_r=0> [Accessed 30 April 2013] Mrwhatis.com (2011). What is pollution haven? [Accessed 26 April 2013] Propertyrightsresearch.org. The Environmental Protection Agency Mission Statement. [Accessed 30 April 2013] Webmeets.com (2012). Does Industry Conservation Matter For Pollution Haven Effects? [Accessed 26 April 2013] Wu, X. (2004). Pollution Havens and the Regulation of Multinationals with Asymmetric Information. Contributions to Economic Analysis & Polciy, 3(2). [Accessed 26 April 2013] Read More