Discussion Paper Series Ｎｏ．48

Governance, Pollution Control
And
The Environmental Kuznets Curve

Masahiro Yabuta
Koki Nakamura
October3,

2003

Governance, Pollution Control
And
The Environmental Kuznets Curve

Masahiro Yabuta (Chuo University)
Koki Nakamura (Graduate School of Economics, Chuo University)

October, 2003

Contents:
1. Introduction
2. Three phases of environmental development-a hypothesis approach
3. A model for phase analysis
4. The hypothesis testing
5. Concluding remarks

Keywords: Governance Index, Environmental Kuznets Curve, Environmental
Consciousness, Pollution Control
JEL Classification: O130

2

1. Introduction

Is it possible to attain economic prosperity without deterioration of environment?

What kindof relation is there between environmental improvement and economic growth? And what is the
major reason to make a changing pattern of environmental policies? We shall investigate an answer
to them in this paper. As far as some pollutants such as SO2, NO2 as well as garbage in per capita
term are concerned; almost economies have experienced their dramatic increase in the process of
rapid industrialization. Accordingly this leads to terrible environmental issues. However, as timegoes by, the government has turned its policy stance to incorporate pollution control and people try
to support this policy change. This might be corresponding to a changing pattern of people’s
preference between income growth and environment. Then people will experience reducing
economic growth but remarkable improvement in health and environment.
The main purpose of this paper is to analyze the interaction between economy andenvironment from both the social and political perspectives. In this paper, our focus is mainly on theeconometric tests on that interaction but a theoretical foundation has already given by Yabuta (2003).
Making the arguments in a nutshell leads to the following remarks. It is natural to accept thatenvironmental situation may keep deteriorating with economic growth at low-income levels, but it
will reach a turning point and then further growth leads to environmental betterment. The inverted
U-shaped relationship between income and the environment is known as the ‘environmental Kuznets
curve’ (EKC). Grossman and Krueger (1993) have found that for some air and water pollutants,
EKC could be empirically observed. A large number of papers, including Cole, Rayner and Bates(1997), related to empirical studies have followed their paper. The common conclusions are that themeaningful EKC can be observed only for local pollutants like NO2 and CO but for global pollutants
like CO2, whereas for some pollutants like CFCs no EKC relation can be confirmed. Possibly, there
may be no general relation between pollutants and economic growth. On the other hand, many
literatures on EKC have come from the theoretical viewpoints, including Vogel (1999), Andreoni andLevinson (2001), Levinson (2002) and Lieb (2002). Their analytical frameworks are basically staticones, which incorporate specific type of utility function and pollution abatement function. On theother side, Selden and Song (1995), Stokey (1998) and Kelly (2003) have given dynamic model
frameworks for EKC. Selden and Song (1995), a revised version of Foster (1973), has shown that in3

an early stage of economic development, rapid increases in pollution abatement can occur due tosome contributors, including technological change of abatement and consumer’s tastes to pollution
abatement. They have also argued that whereas capital accumulation can slow reductions inpollution, high marginal efficacy of pollution abatement can reduce pollution as a whole, leading toan inverted U-shaped EKC. Kelly (2003) has proved that in a dynamic model with pollution stock
externality, the conditions an inverted U-shaped EKC can emerge require the convexity of costfunction of pollution control and the normality of environmental goods. Pollution control provides
benefit, but it charges additional spending to the society. It may be a consequent reasoning that aninverted U-shaped EKC occurs when marginal costs of pollution control rise by less than marginal
benefits. Although the studies concerning EKC have given consistent explanations, there is no clear
understanding that ties static frameworks to dynamic ones. In this paper we shall prove thedeterminants to fix the shape of EKC mainly from statistical and econometric viewpoints1.
The plan of this paper is as follows. In Section 2, three phases of environmental development
are proposed in a hypothesis approach. A historical investigation on the environmental development
will tell us there are at least three stages to phases. In Section 3, a basic model for phase analysis isdeveloped towards a dynamic version. In Section 4, we shall test the hypothesis framework
developed in a basic model. We shall give a statistical test of the structure model with four
independent variables, such as income, preference, technology and governance. In Section 5, after
remarking the relationship between economic development and pollution control, the importance ofthe ‘governance index’ is examined.

2. Three Phases of Environmental Development – A Hypothesis Approach

There is no single process along which the government enforces effective and feasible programs
to curb the environmental problem that people are harmed by pollution derived from specificmaterials. In general, it seems to be very natural to accept that there are three stages or phases along

1 Vogel (1999), for example, is one of the well-composed books concerning theories of EKC. His final remarks in
Chapter 7 related to the views of EKC as a cure-all must be justified when he mentioned to the limitations of EKC as
well. In particular, it should be notable when he wrote that ‘an EKC is the more likely to occur, the less people areconcerned about the pollutant in question.’ (see, p.182). This is the reason why we introduce the phase analysis andwe also take the people’s animadverting or recognition processes of environmental issues into consideration.

4

which the environmental problem comes into conflict between polluters and victims and finallycomes to a negotiated settlement.
The first phase is the animadverting stage upon the terrible environmental situation. Irrespectiveof the allocation of the property rights related to the environmental resources, people must bring an
accusation against polluters as far as they are suffering from pollutions. Even if pollution provide
disastrous to people’s health, the local government or central government sometimes tends tohesitate to adjudge a case because of a lack of hard scientific causal relation or, possibly because it
may be bribed by polluters to forget about what they have done. In almost countries where thedemocratic rule has been under construction, the iniquitous disregard of the fundamental humanrights leads to a strangling of social anti-pollution movements. Accordingly, we find that theprecondition for the society to accept the fact and to take an active interest in the environmental
problem is development of the democratism. Hence, especially in many under-developing countries
where democracy must be less developed, it may be observable that the government takes a negative
attitude about cooperating for anti-pollution procedures.
The second phase is the institutionalization stage of judicial and administrative procedures
against environmental disruption. Due to a radical or socially justified movement of the people, orsometimes due to a international level of standardization for the pollution control, local and/or
central governments are forced to systematize the environmental agents and to enforce theenvironment-related laws such as anti-air pollution law, or water conservation law. In the early stageof this period, however, it may be difficult for these systems to be sufficiently effective partly
because of a lack of scientific as well as technological knowledge, but mainly because of inadequate
criterions to curb pollution. If so, this phase must be an interval for adjusting the environmental
standard. Although there are formally adjusted laws and agencies, this does not mean that they are
truly effective against pollution control.
Actually, for an individual case of pollution dispute, various patterns of the three phases haveoccurred. In the case of Minamata disease, for example, the first stage was for more than twenty
years period from early 1940s when the first victims emerged to 1968 when the Japanese
government officially identified Minamata disease. Although Minamata disease was discovered in1956 and reported a methyl alkyl-mercurial discharged into Minamata bay by Chisso Corporation to
be the cause-substance, Chisso Corporation continued operation until 1968. It is clear that during

5

this period an unpreventable and derelict behavior of the government led to the expansion of patientsof Minamata disease. An urgent closedown of factory should have pollution abatement in Minamata
Bay. During late 1950s to 1960s the Japanese economy was on the high-growth economic path andthe stance of the Japanese government towards environmental issues was quite namby-pamby.
However, people’s antipollution movements in 1960s against local-level pollution all overindustrializing regions in Japan, such as Minamata, Yokkaichi, Kitakyushu and Shizuoka, had led tochanges in environmental policy towards anti-pollution initiated by local governments.
The Basic Law for Environmental Pollution Control was enacted in 1967 and theEnvironmental Agency, now graded up to the Ministry of the Environment, was established in 1971.
As far as water pollution is concerned, the Water Pollution Control Law in 1970 containing
regulations of discharge of effluent, monitoring of the conditions of water pollution, as well as
promotion of measures for domestic wastewater and compensation for damages. Moreover,Environmental Quality Standards for Water Pollutants established in 1970 were target levels of water
quality aim to lowering the environmental risk, protecting human health and conserving the living
environment, including regulations on total mercury and alkyl-mercury compounds. By setting
common national standards applicable to all public waters, civil-minimum safety from water could
be maintained. The second phase is to mean the period when the central government establishes
various environmental systems like anti-pollution laws and organizations.
It might be inevitable, at least in the democratic decision-making process, for the government
to employ environmental policy responses against environmental issues whenever they suffer
victims. In the third phase of the environmental development, the governmental activity against
environmental issues would be tested how it is effective and if it takes them seriously. Monitoring to
the conditions of water or air pollution, or illegal destruction of natural resources should be seriously
applied. Accordingly, the government must order persons to decrease effluents into the public area or
to preserve the natural environment, and take necessary measures such as punishment when they do
not obey. Even if the government environmental law contains such monitoring-punishment system, it
does not mean that it becomes a remedy of great efficacy. Clearly, it depends on the capability or
seriousness of the government whether an effective control on the environmental condition can beattained. Successive and progressive amendments of the environmental quality standards or6

stepped-up monitoring and sanction must entail in the third phase of environmental development2.

Figure 1. Three phases of environmental development

Anti-pollution movements⇒ Local-level of pollution control⇒ Nation-wide pollution control (basic anti-pollution law)
⇒ Global pollution control (international rules)
Few information of pollution

Justification of anti-pollution movement

Ill-regal or less collective Movement
Confirming cause-and-effectOpen access to information
Technology eliminating pollution

relationshipor precautionary behavior

Establishing environment-

Monitoring and punishment,

Related laws and a dministrative measures
First Phase

Increase in emission
or destruction of the nature

Second Phase

precautions against pollutions
Third Phase

Decrease in emission or keep
standards

To summarize the concept of phase analysis related to environmental development, see Figure
1. As shown in Figure 1, the term “first phase” is about the period during which the specificenvironmental issues like air pollution or mercury pollution prevail and antipollution movements
occur. Mainly local governments usually take temporal measures on a case-by-case basis. The“second phase” is corresponding to the period during which both local and central level ofgovernments launch wide social reforms of administrative organizations and laws in the fields ofenvironmental policy. Moreover the “third phase” is to use for identifying the stage period during

2 Harashima and Morita (1998) also gave a useful historical perspectives related environmental policy development.

From the historical and comparative viewpoints, they have mentioned six factors to make differences in thedevelopment processes of environmental policies; the role of local government, information disclosure, influence ofinternational pressure, latecomer status, the market mechanism, and environmental issues in the policy agenda.
Except for foreign factors, the domestic factors they have proposed will be incorporated in our hypothetical analysis.

7which the environmental authorities broaden and strengthen the environmental quality standards andapply the monitoring and sanction rule in a strict and rigorous way. It is notable that there can be noenvironmental policy response against environmental issues unless people with eco-consciousness
countermove against the environmental issues.

3. A Model for Phase Analysis

Models to analyze the phases of environmental development process in a nation are to identify
the differences among the environmental conditions as well as institutional situations in a society.
We shall incorporate model-frameworks some specific characterizations concerning the people’s
eco- consciousness, governmental policy stance against environmental issues and juristic andadministrative institutions. Because these phases can only be identified from historical ortime-horizon viewpoints, we shall compose a model that includes various variables to show achanging pattern of these institutional situations related to environmental policy.
Main task in this section is to develop a dynamic model with a common framework
throughout this paper. Assume that a representative consumer faces the utility function given by(1) U = U (C, P),
where C is consumption and P is pollution. Pollution function is given by(2) P = P (Y, E ),PY >0, PE <0

where Y represents income and E shows the effort to abate pollution. We shall also assume that theprice of consumption goods is unity and the abatement cost of pollution is given by e. Then we havethe consumer’s budget constraint with income, Y:(3) Y = C + e E.
Consumers’ income comes from production and the production function with capital stock, K ,is given by(4) Y = Y(K, P), YK>0, YKK<0, YP<0,where it is assumed that pollution condition is also an important factor affecting production level, an
environmental deterioration leading to less production.
Before composing a dynamic system of the economic as well as environmental development,
it may be notable to show a static system. In a very short-run economy, assume that capital stack is

8constant and pollution has no effect on production. Hence, P and K can be eliminated from (4) and Y
becomes constant. Then consumer behavior to maximize their welfare can be formalized as(5)Choose{C,E} = max U (C, P(E)), subject to Y = C + eE.

Consumer is assumed to be able to control both C and E. Accordingly, maximization behavior of
consumer in this static framework will lead to an optimal consumption, C* as well as an optimal
effort of pollution abatement, E* given as(6)(C*,E*) ∈ {(C,E)｜Uc = Up PE /e, Y = C + eE, Y is constant}

The first term in the curly brackets of (6) implies that the marginal utility of consumption is equal tothat of spending to abate pollution. The pollution level in equilibrium will be given by P*=P(Y,E*).
A temporal equilibrium can be depicted as in Figure 2. Figure 2 has four dimensions: the first
quadrant to show the consumer’s utility function as well as budget constraint, the second quadrant toindicate the pollution function, the third one to give symmetrical relation between pollution level andthe fourth quadrant to derive a development path of consumption and pollution condition. What wewould like to know is just how much the environmental deterioration, or improvement, occurs in aprocess of economic growth usually entailing an increase in income. In Figure 2, assuming that theeffect of increasing pollution on production can be neglected may lead to a conclusion that anincrease in K in the process of economic growth will increase income. Accordingly, a budget line Y1
may shift right-upwards towards Y2. Then there are various possibilities the changing patterns of C
and E will follow. These patterns are corresponding to the evolutions of C and P in the fourth
quadrant in Figure 2. Among many possible development paths in the figure, the one from 1 to 2 aswell as the one from 1 to 3 must be remarkable. In all quadrants of Figure 2, the path from 1 to 2 isthe growth path with an increase in pollution but the growth path from 1 to 3 is the one with adecrease in pollution, although abatement costs of pollution increase in both cases.
It is easy to find that at least four factors determine the development patterns, in particular thechanging patterns of economic growth against environmental conditions. They include the changing
patterns of; (i) the people’s preference of environment with respect to standard of living, i.e. achange in the shape of utility function, U, (ii) the progress in abatement technique to pollution
control, i.e. a decrease in the marginal abatement cots, e, (iii) the end-of-pipe technology to decreasein discharge of pollution wastes into atmosphere or water, i.e. a change in the shape or magnitude ofpollution function, P, and (iv) the environmental policy stance of the government against pollution,

9i.e. a divergence between social welfare function and people’s aggregate utility function.
To give a clearer picture of the environmental development, it would be convenient tocompose a specified version of the model equations. We shall assume the following equations:(7)

U = U 0C α P −β ,(8)P = P0Y γ E −δ ,where U0,P0 as well as α,βandγare positive parameters. By taking the temporal equilibrium
condition given by (6) into consideration, it is easy to derive the following conditions to keep the
economy on the equilibrium:(9)

P = P0Y(γ −δ ) ⎡ (α + βδ )e ⎤

⎢
⎣

βδ

δ

⎥ .
⎦

Figure 2. Development and Pollution

E

3

3
U3

2

2
E*

1

U2

1

P2

U1
P1

Y1

P

O

C*

3
1

C
3

P*

2

1
2

P

Y2

10

If there is a positive increment of income, i.e. dY >0, the economy grows. Then it is clear from(9), dP can be negative as far asγis less thanδfor dY >0. This case occurs whenever the effort ofpollution abatement is sufficiently large and the income effect on pollution is small enough. Hence,the simple model tells us how important the technology against the pollution dispersion is. Moreover,
it is clear from (9) that the changing pattern of parameters also has various effects on the pollution
level. As far as the parameters in (9) are concerned, the smaller α, e and P0 or the larger δ,βwill
be, the pollution condition will be improved3. Clearly parameters α and β are related to thepeople’s choice behavior between consumption and pollution. Because a smaller α, or a larger β,
makes the marginal rate of substitution of pollution abatement with respect to consumption smaller,
it becomes more preferable for people to spend more to pollution control but less to consumption
expenditure. A larger δ, or a smaller P0, implies that pollution control will be attained more
effectively then before. This is the case where a progress in end-of-pipe technology occurs.
Moreover it is clear that a smaller e, i.e. a cheaper abatement cost to emission control, can beeffective for reducing pollution materials.
The above-mentioned remarks show that on the economic growth process where production
continues to grow, environmental conditions can be improved whereas income effect on pollution isalways positive. This can be attainable by changing patterns of parameters concerning people’s
preference, marginal abatement cost as well as end-of-pipe technology. These changing patterns of
the parameters are likely to respond to the stage of the environmental development. Hence aschematic representation concerning the phase analysis can be depicted as the bottom of the each
low from (i) to (iii) in Table 1.
It still remains an unfinished work for the phase analysis of environmental development. Thisissue is just related to the policy stance at local as well as nation level of environmental proceduresby the governments. In the first phase anti-pollution movement of the people is often identified with
anti-governmental action because the governments give priority to economic growth. Accordingly,
they tend to think at the initial stage of development that environmental issue follows economic

3 This is because as for δ, we have⎡ ⎛ (α + βδ )e ⎞⎡α ⎤α ⎤ <0,⎟⎟ −dP = P ⎢log⎜⎜dδ⎥ dδ = P ⎢− log E −α + βδ ⎥⎦⎣⎣ ⎝ βδY ⎠ α + βδ ⎦for dδ > 0.

11growth as a necessity. This situation leads to a conception gap between governments and people
towards environmental issues. To model this we shall introduce a new conceptual parameter
determining a governmental welfare function to be optimized. The divergence of such a conception
gap can be described by θ such that(10) W = U 0 C α P −θβ ,0 < θ ≤ 1,

where W represents the welfare, which the government anticipates maximizing and θ is theparameter, which will be referred as the ‘governance index’. This name comes from the fact that the
government never takes people’s sensitiveness towards pollution into consideration when θ is null
and, for the polar case when θ is unity, the government seems to be a fair representation of thepeople.

Table 1. The development Phases and evolution of variables

The First Phase

The Second Phase

The Third Phase(i)
People’sPreference

Anti-pollution movement at
local level

Anti-pollution movement at
nation level

Think globally, Act locallyGreening activity

α，βA large α andan increasing β

Relatively small α
and a large β

A small α
and a large β(ii)Abatement
technique

Very highInefficient

Gradually decreasing

Very low
Efficiente

A larger e

Decreasing

A smaller e(iii)End-of-Pipe
technology

Low and inefficienttechnology

Gradually improving

Eco-friendly technology

P0,δ

A large P0
and a small δ

Decreasing in P0
and an increasing δA small P0
and a largeδ

(iv)
Governancematters

Growth-oriented
Neglecting people’s
preference

Incorporating people’s
welfare as well as firm’s
profits

Environment-oriented
Firstly initiating people’s
preferenceθ

Close to null

Increasing

Close to unity

In this case, the governance index is clearly corresponding to the governmental respondent
towards people’s requisition against environmental issues. We can enumerate some reasons for thedifference in θ as follows: (i) a growth-myth the government believes or a faith that12

environmentalism will lead to reduce economic growth, (ii) the capacity or energy of thegovernment to effectively formulate and implement environmental policies, (iii) the institutional
procedures by which governments are selected, monitored and replaced, and (iv) the accountabilityor transparency of the environmental policies. In the very initial stage of the economic development,
the institutions in a country may be still ill organized and their environmental procedures are soweak that government cannot implement the anti-pollution policies effectively. However, politicalmaturation will lead a society whose governmental views mirror people’s preference completely.
Therefore, it is inevitable that the ‘governance index’,θ will continue to evolvefrom almost null

towards unity while the economy is developing.
Instead of (7), the government must plan to maximize (10) subject to the social budget
constraint given by (3). Therefore, the optimum process of expenditures for consumption andpollution abatement can be given by the followings:
(11)

C=

(12) E =αY,α + θβδθβδY,e(α + θβδ )and, for the evolution of the environmental condition, we have(13) P = P0Y(γ −δ ) ⎡ (α + θβδ )e ⎤

⎢
⎣

θβδ

δ

⎥ ,
⎦

that is identical with (11) when θ is unity. It is clear from (13) that ∂P / ∂θ is negative, implyingthat an increase in θ will reduce pollution. Figure 3 shows how the pollution level changes in theeconomic growth process. To give a simple simulation about pollution, initial conditions concerningparameters in (13) as well as initial income are fixed in the sub-table of Figure 3. Moreover it isassumed that the economy of each case grows by 2% at annual rate.
In Figure 3, case 1 represents a reference path where no change in θ and e occurs. To comparewith case 1, θ, the ‘governance index’, in case 2 is assumed to continue growing by 1% annual rate.
Case 3 shows the environmental development path where only decreasing in e, the marginal
abatement cost of pollution, by 1% annual rate occurs. Moreover, case 4 indicates how pollution canbe abated when both θ and e change at a constant rate. It should be noted that in case 3 or case 4, the‘governance index’ is actually very close to unity, 0.996, when per capita income is almost $10,000.

13

Along the economic growth path towards $10,000, case 3 shows that the institutional conditions aswell as political circumstances have been adjusted towards the effective pollution controls. The
tendency for reducing pollution can be strengthened by introducing more efficient abatement
technology as shown by case 4. These cases are all-imaginary and far from what happens in the realworld. However they tell us the possibilities of actual paths or trends that the real environmental
development follows. For example, among evolution patterns of the parameters like θ and e, it iseasy to choose a possible pattern where a pollution condition changes from A to C via B in Figure 3.
This is the case called inverted U-shaped EKC (Environmental Kuznets Curve). As proved in thissection, what kind of EKC, a relationship between income and environmental condition, emerges in
the real economy is dependent on the changing patterns of many factors including technology,
governance, as well as people’s preference towards the good environment. Therefore, it seems
impossible to give a common tendency of environmental development with respect to economic
growth. EKC should be different from nation to nation.

Figure 3. Simulation paths
2500

case 1

Pollution (P )

2000

B

case 21500

case 3
1000

CA

case 4

500

0
0

2000

4000

6000

8000

10000

Income($Y )θeOthersCase 1Case 2

Case 3

Case 40.1 (constant)
1.0 (constant)α=0.8, β=1.0,

Increase by 1%
1.0 (constant)γ=0.6，δ=0.4，

0.1 (constant)
Decrease by 1%
P0=100, Y0=100,

Increase by 1%
Decrease by 1%
Growth rate=0.02

14

4. The Hypothesis Testing

From cross-sectional view, to follow the foregoing reasoning leads us to predict that thelower levels of ‘governance index’ will be associated with higher levels of pollution. Moreover,some other non-income factors, including anti-pollution technology, are proved to be important
determinants of pollution level in the economy4. Hence the underlying structure model to be tested
will be given by(14)

ENVIRONMENT = f ( INCOME, PREFERENCE, TECHNOLOGY , GOVERNANCE) .
For explanatory variables in (14), INCOME means the par capita income in terms of PPP

adjusted US dollars and TECHNOLOGY represents the levels of anti-pollution technology. Because
anti-pollution technology adopted in the economy may be close to a standard in all over industries,
we shall measure it in averaged points of the power of technological progress, which are reported by
the Global Competitiveness Report. As far as PREFERENCE is concerned, we shall use the illiteracy
rate and /or the rate of coverage of fixed line and mobile telephone. This is because people’s
environmental consciousness will be prevailed and advocated well when they have sufficiently
effective means to communicate each other. Literacy is very fundamental capacity to communicate
via printed media and the telephones in a society have played most popular item to communicate
each other. When people can share their social issues or public nuisance among them, they will havecommon will, emotion and mind against such social problems, leading to regional anti-pollution
movements5.
The fourth explanatory variable in (14) is GOVERNANCE that shows the ‘governance index’
to be included to allow for ‘governmental respondent’ towards people’s requisition against
environmental issues. In the absence of direct measures for the ‘governance index’, we shall adopt

4 As Roca (2003) has mentioned, it is the real world where matters are too complicated to be predicted by only a few

independent variables. In our model, we identify any reduction of environmental costs with a technological progressthat will leads to more effective abatement of pollution. He stressed the importance of displacement of environmental
costs among remote places or remote generations. Although we do not incorporate his arguments explicitly, it may bepossible to accept that displacement can be affected through changing patterns of people’s preference or
governmental reaction towards environmental issues at present.
5 An interesting procedure on EKC has done by Lekakis and Kousis (2001). As for three European countries, Greece,
Spain and Portugal, they have reached conclusions that rising per capita income leads to more and more frequenciesof citizen’s environmental actions and proved that democratic governments and open political systems may certainly
enhance environmental reactions through political processes. Their argument that the outcome of EKC is dependent
on an interaction of ‘the demand for and supply of environmental qualities as the public goods’ seems to be very
close to ours, which contains an interaction between individual and public behavior towards environmental issues.

15

some of KKZ (Kaufmann, Kraar and Zoido) indicators6. The original version of KKZ indicators hasdeveloped by Kaufmann, Kraar and Zoido (1999) and latest version is published in 2002. They havecomposed the indices to measure the situation of governance, which is defined as the ‘tradition andinstitution by which authority in a country is exercised’7. Three parts and two indices in each partcompose KKZ indicators. Three parts are (i) the process by which governments are selected,
monitored and placed, including ‘Voice and Accountability’, and ‘Political Stability’, (ii) the
capacity of the government to effectively formulate and implement sound policies, including‘Governmental Effectiveness’ and ‘Regulatory Quality’, and (iii) the respect of citizens and the state
for the institutions that govern economic and social interactions among them, composed by ‘Rule ofLaw’ and ‘Control of Corruption’ 8 . KKZ indicators are depicted as in Figure 4 that shows
correlations of any other indices of KKZ to ‘Voice and Accountability’.

Figure 4. Governance indicators
3.00

Political Stability

Voice andaccountability

2.00

Government
Effectiveness

1.00
0.00
-3.00

-2.00

-1.00

0.00

1.00

2.00

Regulatory Quality

-1.00
-2.00

Rule of Law

-3.00
-4.00

Control ofCorruption

6 KKZ indicators consist of two distinguish sources; polls of experts and surveys of businesspeople or citizens. KKZ

indicators are estimated by using such compound sources from 17 publications, like Country Risk Review byStandard and Poor’s DRI McGraw-Hill, World Competitiveness Yearbook by Institute for Management andDevelopment, and so on. In this connection, Ishii (2003) also gave a useful positive analysis for economic
development. She has tested various patterns of explanatory variables including KKZ to get robust estimations for
economic growth.
7
In this connection, see Kaufmann, Kraar and Zoido (2002), pp.4-5.
8
Our aim to incorporate ‘GOVERANANCE’ into analysis is to make it clear whether the government has a sufficientqualification for representing people’s attitude towards environmental issues faithfully. Although we shall focus on
the aggregate effect of six KKZ indicators, each index has still its own implication and the strength of contribution toanti-pollution might be different. Damania (2002) has stressed a necessity to study the consequences of corruption on
environmental outcome because almost researches concerning environmental compliance appear to have ignored this.
He has proved from theoretical views that corruption is one of the major causes of environmental damage indeveloping countries and the judiciary is also important. Even if it is the case, it cannot be rational way to disregard
other four factors that also must be causes to affect on various anti-environmental policy actions. However, it seems
to be a very suggestive piece of writings that environmental policy cannot be effective without dissolving problems of16

Figure 5.

corruption.

Six Clusters of Governance Index17

Moreover, Figure 5 shows how each cluster of governance develops with par capita income.
From these graphs, it can be found that the selection, monitoring and replacing processes of thegovernment and the implementing processes of sound policies can be enforced when the par capita
income is developed.
We have estimated equation (14) for each of the environmental or pollution variables, such as
the sanitation level, the accessibility to safe water, Sulfur dioxide, Nitrogen dioxide and particulatematters9. Before summarizing estimation results, it is notable to mention that the data-materials arefrom slightly different periods; for example per capita income in terms of PPP base is in the year
2001, the sanitation level, the accessibility to safe water and all variables related to ‘GovernanceIndex’ are in the year 2000, but any other pollutants are in the year 1998-9. This is mainly because
there is only a few adequate time-series data in the field of pollution materials. Moreover, thedifficulties of data collection, especially about the developing countries, sometimes put limitations
on econometric procedures of estimation.

4.1 Results
Table 2 shows the regression results when independent variable is sulfur dioxide, nitrogendioxide and particulate matters sanitation level. Many authors have estimated the relation between
economic growth and environmental situation and tried to prove the existence of ‘inverted U–shaped’ EKC. To accomplish this task, Boyce (2002) for example, they have included not only par
capita income but also squared as well as cubed income as the explanatory variables. Because it
seems to be hard to explain the justification of this assumption from theoretical viewpoints, we shalluse per capita GNI only in logarithm term.
In the case of sulfur dioxide in Table 2, we obtain a plausible positive correlation between
income and pollution and find an effectiveness of higher technology to reduce pollutant. As for
REFERENCE, higher literacy rate, i.e. lower illiteracy rate, must lead to better environmental
circumstances in urban area, though the effect of traditional telecommunication measures on
decreasing SO2 is not statistically significant. Among clusters of GOVERNANCE, two elements are9

As for PM, SO2 and NO2, we employ data by 2003 World Development Indicators, which report only some major
cities in 53 countries. Among them we adopt not the capital but the city that have the largest population in the
country.

18

statistically significant: both ‘Voice and accountability’ and ‘Rule of Law’ have desirable impact on
reducing pollutant. This is acceptable result because adjusting juristic as well as administrative
systems to industrializing economy, for example, will lead to a remarkable improvement to control
some pollutants. Nitrogen Dioxide also improves with technical progress. The results concerning‘Voice and accountability’ andʻRule of Law’ are similar to the case of SO2. The fact that particulatematters (PM) monotonically increase with income is also similar to other two pollutants. This result
is consistent with a general understanding that an industrializing economy with a rapid growth inTable 2.
Explanatory Variables

The determinants of air pollution
Sulfur Dioxide

Nitrogen Dioxide

Particulate Matter

INCOMEPar capita GNI(LOG, PPP)

5.069

(1.773)*18.283(3.543)#8.706(2.293)**

PREFERENCE

Illiteracy rate

0.828

(2.990)#0.007(0.009)2.639(6.727)#

GOVERNANCETECHNOLOGY

Fixed Line &Mobile Telephone
Voice andAccountability

0.002(0.213)-0.021(-0.920)-0.021(-1.289)-13.603(-2.637)#-14.289(-1.442)-9.876(-1.344)

Political Stability

17.506(1.694)*47.148(2.311)**14.652(1.614)10.747(0.946)16.842(0.740)19.059(1.235)1.977(0.199)-3.955(-0.195)-6.865(-0.486)

Rule of Law-21.441(-2.411)**-33.941(-1.954)*5.700(0.569)Control ofCorruption-2.923(-0.388)1.949(0.137)-16.113(-1.551)

Average of GCR-3.954(-0.623)-22.424(-1.894)*-8.677(-1.017)

Government
Effectiveness
Regulatory
Quality

Adjusted R-squared

0.554

0.259

0.718

Durbin-Watson

1.336

1.201

1.992

Number of observations

39

35

42

1) *, ** and # are statistically significant at 10%,5% and 1% level respectively.

heavy industry as well as in transportation has caused particulate matters to increase in urban area. It
is notable; however, that unlike air pollutants such as SO2 or NO2, it seems to be much easier for
people to identify how dangerous PM is for their health and for their daily life. People had no otherway to breathe whereas they can drink water to buy bottled water from Switzerland instead of theirown well. In fact, the Regulatory Law against Dust emitted from Factories and Business Sites in191957 was one of the earliest national-level of anti-air-pollution laws in Japan after the World War II10.
Moreover, a better literacy might lead to a better communication among people towards
anti-pollution movements so that the government has been urgently forced to establish someinstitutional or legal systems. By this interaction between government and people we may findstatistically significant favorable effects of higher income on emissions of PM. This is a possible
explanation for the impact of literacy to be consistent. Although some clusters of GOVERNANCE
have different effects, the impact of ‘Voice of Accountability’ is generally consistent with our
hypothesis.
Our results are reported in Table 3 for the national-level variables; sanitation, safe water andTable 3. The determinants of environmental situation (national-level)
Explanatory Variables

Access to improved
sanitation

Access to improved
drinking water
resources

Protected area ratio tosurface area 1)

INCOMEPar capita GNI(LOG, PPP)

12.053(10.454)#7.996(4.216)#------

PREFERENCE

Illiteracy rate

-0.117(-1.062)0.326(1.796)*-------0.006(-1.051)

0.007(0.708)-------1.117(-0.411)

3.574(0.799)7.012(3.484)#-1.699(-0.639)0.529(0.121)1.130(0.347)0.524(0.173)6.389(1.284)-3.352(-0.980)

3.893(1.160)-0.071(-0.013)-7.574(-2.400)**

Rule of Law

1.895(0.513)1.048(0.172)4.466(1.176)

Control ofCorruption-0.304(-0.079)-4.757(-0.751)4.513(0.927)

Average of GCR-3.404(-1.285)0.129(0.030)-1.233(-0.253)

Fixed Line &Mobile Telephone
Voice andAccountability
Political Stability
GOVERNANCETECHNOLOGY

Government
Effectiveness
Regulatory
Quality

Adjusted R-squared

0.427

0.410

0.210

Durbin-Watson

2.043

2.161

---

Number of observations

62

62

92

1) The model that the nations over 10,000US$ are eliminated and per capita GNI is in nominal US$ term with theconstant of 34.446 (2.356) to be estimated.
2) *, ** and # are statistically significant at 10%, 5% and 1% level respectively.

10 Air pollution control law was established in 1968, more than ten years later when the Regulatory Law against Dust
was established.

20

national protected area. To compare with individual pollutants studied above, each national-level
environmental situation has lower adjusted R-squared and statistical robustness is so weak.
Moreover, we will find it inconsistent to our hypothesis that technical progress has negative
impact on such environmental situations, like safe water, sound sanitation and protection of naturalarea, though estimation results are statistically insignificant except for sanitation.. However, it may
be notable that in PREFERENCE, the literacy rate is statistically significant and consistent with our
hypothesis. We do not have any statistically consistent results about protected area11. Some ofindependent variables in GOVERNANCE, such as ‘Voice and Accountability’ and ‘Rule of Law’,
however, seem to have consistent impacts on protected area ratio.

4.2 Contribution by Factors: a Decomposition Procedure
Our hypothetical approach in the proceeding sections suggests that there is no logicalconsequence of a predictable relation between economic growth and environment, not always
leading to an inverted U-shaped EKC12. Statistical procedures for estimating the structural model
given by (14) also have proved that the hypothesis is very likely to be statistically significant, inparticular for the air pollutants in Table 2. Accordingly, this allows for the possibility that the actual
pollutants, such as PM, NO2 or SO2, in a city of the specific countries can be decomposed into four
major factors; INCOME, PREFERENCE, GOVERNANCE and TECHNOLOGY. Following Table 2that shows the estimated equation for each pollutant, we can decompose the actual pollution level
into the four factors. The results are summarized by Table 4 that focuses on the different patterns of
the decomposition in OECD countries to compare with those of non-OECD countries. Moreover,Figures 6 includes more detail information about pollutants emitted in related countries.
In each graph of Figure 6 concerning three different pollutants, two slightly different but

11 Bimonte (2002) has given the empirical tests for the percentage protected area. Its theoretical base seems to beslightly unclear but he uses some explanatory variables such as income distribution, education, information
accessibility (newspaper coverage). After naming these variables ‘participation’, he has proved how importantparticipation is to determine the environmental situation. His point must be justified because ‘participation makessocial preference shift away from private towards public goods.’ (see p.154) This is also the basic recognition toapproach the EKC analysis in our paper. As far as statistical procedure is concerned, however, the estimation has been
done only for the EU countries.
12 The robustness of the statistical evidence for the existence of an inverted U-shaped EKC does not always
supported by empirical works. Harbaugh, Levinson and Wilson (2002), for example, have proved that there is little
empirical support for an inverted U-shaped relationship between several air pollutants and national income. They
have also concluded that the existence of an inverted U-shaped EKC is very sensitive to data structures as well as toeconometric specifications.

21

similar lines show the actual as well as predicted levels of pollutants respectively, and four
cumulated bars indicate factors into which the predicted pollutant can be decomposed. Actually,
countries are ranked by their environmental performance. For example, France performed best but
Egypt worst as far as PM emission is concerned. A careful observation will lead us to the following
points. In the case of decomposition of PM, TECHNOLOGY has positive but INCOME has negative
effects on reducing emission in every countries. Although the impacts of GOVERNANCE seem tobe ambiguous, greater contribution to reduce PM may be stemmed from PREFERENCE in lesspolluted countries. In many developing countries, like South Africa, Brazil, Indonesia, China, India
and Egypt, less PREFERENCE have effect on increasing pollution, although it appears to have
opposite effect with greater PREFERENCE in most developed countries. In the cases ofdecomposition of SO2 and NO2, we obtain the similar conclusions to INCOME and TECHNOLOGY
that the former is positive but the latter is negative factors to increase pollution. It should be notedthat GOVERNANCE must be a negative factor on emission of SO2 in almost countries except for a
few countries like Egypt, Mexico and China, and REFERENCE is still a positive factor to greater
pollution. As far as NO2 emission is concerned, PREFERENCE proves to be a negative factor for all
countries and GOVERNANCE to be a small but positive factor for almost counties with a few
exceptional countries such as Thailand, India, Turkey and Romania.
In many cases, we should be careful when we apply results of decomposition procedures ofpollution to each country. This is partly because a less robustness of statistical significance but
mainly because there must be any other implicit reasons, including erratum of the related data, todetermine factors.
Table 4 provides the average figures of decomposition analysis. Factors of each pollutant areclassified into two region categories; OECD and non-OECD countries. Table 4 proves that emissionof each pollutant in an OECD country is almost a half or two-third in a non-OECD country. In thecase of PM, it is clear that the difference in average emission levels between two regions mainly
comes from the following reasons; in OECD countries, peoples’ preference is negative factor but in
non-OECD countries this is a still positive factor on pollution. This finding implies that an
improvement of the communication measures among people in non-OECD countries still do not leadto a betterment of environment although it does not always mean that an advanced circumstances
concerning PREFERENCE cannot be factors to reduce pollution. It might be fair to conclude that the22negative role of the factors of PREFERENCE to worsen pollution will be altered into positive one
when they reach to their mature level, at least the minimum of OECD countries, in the process of
economic growth. Figures in Table 4 shows that if the factor of PREFERENCE in a non-OECD
country could have had the same impact on pollution as that in an OECD country, emissions in bothregions could be kept almost the same. Although the TECHNOLOGY factor is a negative one topollution for the both regions, the levels of impact are different, in an OECD country the impact
being almost by thirteen points less than that in a non-OECD country.

Figure 6. Decomposition of pollutant into factors: country base

μg/m3

Decomposition of PM emission

250
200

200

PM
estimate

150

INCOME

100

100

PREFERENCE
GOVERNANCE

50

TECHNOLOGY

0

0

-50
-100
FranceNew ZealandSwedenVenezuela, RB
Australia
Finland
Slovak Republic
Ireland
NorwayUnited Kingdom
United States
Denmark
Switzerland
Germany
Romania
CanadaHungarySouth Africa
Belgium
Colombia
Ecuador
Italy
Netherland
Spain
Austria
SingaporeJapan
Korea South
UkraineBrazilGreeceArgentina
TurkeyPhilippines
MexicoChile
ThailandBulgaria
Indonesia
China
India
Egypt, Arab Rep.

-100

Decomposition of SO2 emission
μg/m3
100

100

75

75

SO2
estimates

50

50

25

25
0

-25

-25

-50

-50
SwedenFinlandDenmark
NorwayNetherland
New Zealand
Romania
Switzerland
ThailandAustria
FranceUkraineCanadaGermany
Japan
South Africa
Belgium
IrelandSingapore
Slovak Republic
Ecuador
Spain
United Kingdom
United States
Australia
Chile
Italy
Philippines
Venezuela, RB
GreeceBulgaria
Hungary
Brazil
Korea South
India
TurkeyEgypt, Arab Rep.
MexicoChina

0

INCOME
PREFERENCE
GOVERNANCETECHNOLOGY23

Decomposition of NO2 emission
μg/m3
200

200
NO2

100

100

estimates
INCOME00

PREFERENCE
GOVERNANCE

-100

-200

-200

TECHNOLOGY

SwedenThailandGermany
Slovak RepublicSingapore
South Africa
India
Finland
Switzerland
Austria
CanadaNorwayTurkeyBelgium
Hungary
UkraineDenmark
FranceVenezuela, RB
Netherland
New Zealand
Korea South
GreeceSpain
Japan
Romania
United Kingdom
United States
Australia
Chile
BrazilArgentina
Bulgaria
China
MexicoItaly-100

As for the factor of GOVERNANCE, in an OECD country it has a larger impact on pollution
by eight points than that in a non-OECD country. These findings lead to a possible explanation that
non-OECD countries have emitted PM more than OECD countries because of less GOVERANCE
and TECHNOLOGY. A negative effect of PREFERENCE to reduce pollution in non-OECD
countries, just opposite to OECD case, must be a most striking feature, meaning that people may be
still less conscious or ignore how much various environmental effects on their life are important.
As far as the emission of SO2 is concerned, like in the case of PM and NO2, the INCOME
factor gives positive contribution to increase pollution and only a few difference in the contribution
level by INCOME can be observed between OECD and non-OECD countries, only about 7 points,
but 11 points for PM and 23 points for NO2. As for the factor of TECHNOLOGY, it contributes toreducing pollution about 15% in non-OECD countries, but slightly large by 6 points in OECD
countries. Most prominent features for the case of SO2 can be found for the factors like
GOVERNANCE and PREFERENCE. It is a striking distinction to the case of PM that the factor of
GOVERNANCE in OECD countries tends to negatively contribute to pollution whereas it almost
affects nothing on pollution in non-OECD countries. This implies that an improvement of somepolitical process of decision making in non-OECD countries, for example, still do not lead to abetterment of environment. Like the case of PM, the factor of PREFERENCE in non-OECD
countries contributes positively to pollution, almost triple to compare with that in OECD countries.
This finding also leads to an implication that people in non-OCED countries may be still less

24

conscious or ignore how much environmental effect of SO2 emission on their life is serious.

Table 4. Decomposition of Pollutants into Four Factors
Averageemission
OECD

28.35

Non-OECD

61.95

OECD

18.38

Non-OECD

38.82

OECD

63.30

Non-OECD

87.33

PM
μg/m3

SO2
μg/m3

NO2
μg/m3

Factors
INCOME

PREFERENCE

GOVERNANCETECHNOLOGY

87.96
310.27%76.73
123.85%-23.15-81.65%19.05
30.75%

8.33
29.39%
0.63
1.02%-46.29-163.28%-33.41-53.93%51.24
278.75%44.43
114.44%

3.16
17.22%
10.34
26.63%-16.08-87.48%0.17
0.43%-21.10-114.82%-15.47-39.86%184.70291.79%161.30184.69%-24.50-38.70%-6.44-7.37%

10.06
15.89%
9.09
10.41%-119.59-188.92%-80.73-92.43%

5. Concluding Remarks
It is our main task to analyze the relationship between economic development andenvironmental situation. Our focus is mainly on the econometric tests on this relationship and theirresults are almost consistent with the hypothesis.
In order to give historical perspectives concerning environmental development in the economy,
we firstly formalized a new approach termed ‘the phase analysis’, which makes it possible to classify
the evolution processes of movements or policies against pollutants into three phases. A chain of
events from occurrence of environmental issue to procedure of countermeasure towards
environmental danger can be observed in the evolution process of every pollutant. The first phase is
the period during which the specific environmental issues prevail and antipollution movements
initiated. The second phase is the period during which both local and central governments launchwide social reforms of administrative organizations and laws in the fields of environmental policy
while in the third phase, the environmental authorities broaden and strengthen the environmental
quality standards and apply the monitoring and sanction rule in a strict and rigorous way. As
Grossman and Krueger (1995) pointed out and Boyce (2002) has cited recently, people’s demand as
well as ‘vigilance and advocacy’ are most critical elements that enforce the government to induce
more environmental-friend policy and implement its commitment. There can be no environmental

25

policy response against environmental issues unless people with eco-consciousness countermove
against the environmental issues. In this paper we have incorporated such people’s activities into thebasic model. After modeling the simple relationship between income and environmental situationfrom our hypothetical approach, we reach our underlying structural model and test its empiricalvalidity. Although the national-level of environment-related data is not so valid, the results
concerning the city-level of pollutants like PM, SO2 and NO2 is statistically significant.
Our regression analysis consists of two parts. One is the ordinary regression procedure on
which we introduce some independent variables concerning KKZ (Kaufmann-Kraar-Zoido) index ofthe ‘GOVERNANCE’ besides income, preference and technology. As for the general outlook of theresults, the following explanations are possible. First, income effect is positive to increase pollutant.
An increase in per capita income does not lead to any reduction of pollutant. Second, however, ahigher rate of literacy and technology appear to put curbs on pollution. People’s demand for better
environmental quality can reach to government when they sufficiently communicate and discuss
about the environmental issues. Third, well education and/or high literacy must lead to less pollution.
Finally, among six factors in KKZ index, higher ‘Voice and Accountability’, more sophisticated‘Rule of Law’ or more adequate ‘Control of corruption’ generally associates with less pollution
while higher ‘Political Stability’ appears not to be associated with less pollution. Another procedure
related to the statistical analysis is the factor-decomposition by which pollution can be decomposed
into four specific factors; INCOME, PREFERENCE, GOVERNANCE and TECHNOLOGY. Major
findings are as follows. First, an improvement of the communication measures among people in
non-OECD countries still do not lead to a betterment of PM emission although it does not always
mean that an advanced circumstances concerning PREFERENCE cannot be factors to reduce
pollution. It might be predicted that the negative role of the factors of PREFERENCE to worsen
pollution in non-OECD countries will be altered into positive one when they reach to their maturelevel. Second, the TECHNOLOGY factor plays negative role to pollution for the both regions. Third,
as for the factor of GOVERNANCE, in an OECD country it has a larger impact on pollution by
eight points than that in a non-OECD country. These findings lead to a possible explanation that
non-OECD countries have emitted PM more than OECD countries because of less GOVERANCE
and TECHNOLOGY. Fourth, as for the case of SO2, unlike the case of PM, the factor of
GOVERNANCE in OECD countries tends to negatively contribute to pollution whereas it almost
affects nothing on pollution in non-OECD countries. This implies that an improvement of somepolitical process of decision making in non-OECD countries, for example, still do not lead to abetterment of environment. Fifth, people in non-OCED countries prove to be still less conscious or
ignore how seriously they are suffered from the damage of SO2 emission.
One policy implication of our findings is that although there is no direct logical relationshipbetween income and environment, environmental situation in non-OECD countries can be26accompanied by improvements in non-income factors such as PREFERENCE as well as
GOVERNANCE that might be propelled by economic growth in per capita income term.
Accordingly, it must be important for OECD countries to lead developing countries towards
achieving

improvements

in

those

factors.

Ourfindings

also

prove

that

promptingenvironmental-friendly technology in non-OECD countries possibly via foreign aids and foreign
direct investment is timeworn but still important political procedure.

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Acknowledgement
We would like to thank for the financial support from Grant-in-Aid for Scientific Research, C1,
2003-2005, by JSPS (Representative of the Research Project is Masahiro Yabuta).