Freedom , growth , and the environment

A number of recent papers have found that certain measures of pollution worsen and later improve as income per head increases. It is widely believed that the downhill portion of this inverted-U curve reflects an induced policy response; that, as incomes rise, citizens demand improvements in environmental quality, and that these demands are delivered by the political system. In this paper we find that, for a number of pollution variables, an increase in civil and political freedoms significantly improves environmental quality. For other pollution variables, however, we find that freedoms have no effect. The former finding suggests that political reforms may be as important as economic reforms in improving environmental quality worldwide. The latter finding hints that the observation that pollution levels fall with income, once income becomes high enough, may not always reflect an induced policy response. Introduction Is economic growth good or bad for the environment? Recent empirical evidence points to a pattern reminiscent of the Kuznets curve: for a number of indicators of environmental quality (but not all), economic growth seems to be accompanied by a deterioration in environmental quality at low income levels and an improvement in environmental quality at high income levels.1 This is a striking result; but, as we demonstrate in this paper, it is also a partial result. Environment and Development Economics 5 (2000): 433–456 Copyright © 2000 Cambridge University Press We are grateful to Gene Grossman and Alan Krueger for supplying us with their computer programs and data. We also thank Freedom House for making their data available to us. Our research was partly funded by a MacArthur Foundation grant to the Global Environment and Trade Study. We have learned much about the topic of this paper from Partha Dasgupta, Paul Ehrlich, and Karl-Göran Mäler. Jagdish Bhagwati, Robert Deacon, Charles Perrings, and Todd Sandler provided helpful comments on an earlier draft, as did participants at the June 1998 World Congress of Environmental and Resource Economists, the NBER’s 1998 Summer Institute, and the GETS/MacArthur Foundation Workshop on Trade and Environment. 1 See the special issue of this journal, Volume 2, Part 4, October 1997. See also Cropper and Griffiths (1994), Grossman and Krueger (1993, 1995), Hilton and Levinson (1998), Holtz-Eakin and Selden (1995), Selden and Song (1994), Schmalensee, Stoker, and Judson (1998), Shafik (1994), and World Bank (1992). Though the estimated models are in a reduced form, and so cannot tell us why the inverted-U might exist, there is a kind of consensus on the principal mechanism at work. This is that there is an induced policy response: as nations become richer, their citizens demand that the non-material aspects of their standard of living be improved. But if this reasoning is correct, then the observed levels of environmental quality will depend on more than a nation’s prosperity. They will depend also on citizens being able to acquire information about the quality of their environment, to assemble and organize, and to give voice to their preferences for environmental quality; and on governments having an incentive to satisfy these preferences by changing policy, perhaps the most powerful incentive being the desire to get elected or re-elected. In short, they will depend on civil and political freedoms. These vary widely, however, both across countries and over time. So the omission of these variables could be important. In this paper we re-estimate the relations estimated by Grossman and Krueger (1995; hereafter, G–K), including as explanatory variables certain measures of civil and political freedoms. In essence, we ask a different question from the one that introduced this paper. We ask: Is more freedom good or bad for the environment? For a number of measures of environmental quality, we find that our freedom variables are jointly highly significant.2 Inclusion of the freedom variables does not affect the qualitative nature of the relationship between pollution and per capita income or the associated turning points; we find no evidence that the results reported by G–K are biased. But our results do show that, for a number of different measures, environmental quality is increasing in the extent of civil and political freedoms. In this sense, our results suggest that more freedom is good for the environment. Moreover, the effect is quantitatively and not just statistically significant. In the case of sulfur dioxide the effect is especially strong: we find that a low freedom country, with an income level near the peak of the inverted-U, can reduce its pollution at least as much by increasing its freedoms as it can by increasing its income per head. This is policy relevant if, as we argue, freedoms can be controlled independently of incomes. Levels of some measures of environmental quality, however, seem not to depend on freedoms, even when the underlying relationship exhibits a strong inverted-U, and this hints that the downhill portion of the inverted-U 434 Scott Barrett and Kathryn Graddy 2 After writing this paper, we learned that Torras and Boyce (1998) also used the Freedom House data to estimate similar relationships. They use a different transformation of these data and a somewhat different model to determine the effect of the ‘distribution of power’ on pollution levels but obtain broadly similar results. Congleton (1992), Murdoch and Sandler (1997), Murdoch, Sandler, and Sargent (1997), and Fredriksson and Gaston (1998) also test for links between democracy and environmental policy. However, these papers are concerned with transboundary environmental damage—a very different situation than examined in this paper. Bohn and Deacon (1997) examine the connections between investment in natural resource industries and measures of both political stability and the type of government (distinguishing, for example, between parliamentary and non-parliamentary democracies). This again is a different kind of analysis using different data. may not always result from an induced policy response. True, even dictatorships have to please some constituency to remain in power (see Olson, 1993). So, even if our freedom variables were not significant, a kind of induced policy response could still underly the inverted-U. But it does strike us as peculiar that freedoms would show up as being very significant in some cases and not at all significant in others. We comment on possible reasons for these results, and their implications for future research, later in the paper. Before proceeding with the substance of the paper, we wish to emphasize that our results are not immune to the criticisms that have been levelled against the environmental Kuznets curve literature.3 Like previous studies, we consider a selected number of pollutants only; our results imply nothing about optimality; and the models from which they are derived ignore system-wide linkages. What we add in this paper is a perspective that has not been expressed previously. We believe that our results are important, but they are important only in this context. Section 1 discusses the data used in our study, while sections 2 and 3 present our econometric results for air and water pollution, respectively. Section 4 extends these results, by controlling for country fixed effects. The final section of the paper discusses the implications of our work, both for the literature on growth and environment and the literature on trade and environment. 1. Data With the exception of our freedom variables, we rely entirely on the data used by G–K. The pollution data were gathered by the Global Environmental Monitoring System and have two great virtues: they are comparable across different countries; and they are direct measures of environmental quality (as opposed to, say, pollution emission levels), and so are measures that citizens will have preferences over—preferences that can find expression at the ballot box or otherwise.4 Air quality is measured in selected urban areas; water quality in selected river basins. The income data are from Summers and Heston (1991), and adjust for differences in purchasing power. Note that these data are country averages, whereas the pollution readings are local.5 Time and physical features of the pollution sites (like mean annual water temperature) are also included in our regressions as independent variables. For a more detailed description of these data, see Grossman and Krueger (1995). Our measures of civil and political freedoms are constructed from indices developed by Freedom House, which have been used widely in the Environment and Development Economics 435 3 See in particular the policy forum in this journal, volume 1, part 1, February 1996. 4 Shafik (1994) and the World Bank (1992) also examine a number of direct indicators of environmental quality. 5 Grossman and Krueger (1995, p. 361) note that the use of country-level GDP is appropriate since ‘environmental standards are often set at a national level’. This statement is correct, but there are also variations. For example, in the United States, some regions have not attained the standards that were set for them. Furthermore, environmental standards are not always uniform, even if they are set at the national level. In the United States, for example, regions with superior air quality have been protected from any significant deterioration in air quality. literature.6 The civil freedoms index reflects constraints on the freedom of the press, and on the rights of individuals to debate, to assemble, to demonstrate, and to form organizations, including political parties and pressure groups. The political freedoms index reflects whether a government came to power by election or by the gun, whether elections, if any, are free and fair, and whether an opposition exists and has the opportunity to take power at the consent of the electorate. The Freedom Hou