32 Some recent research on industrial countries has suggested that, with proper policies, reasonable economic growth can be compatible with preserving the environment.” For example, the rapid fall in energy use in the OECD countries (23 percent fall in energy requirements per unit of GDP over 1970-87) suggests that other inputs can be elastically substituted for exhaustible resources if price incentives are sufficiently strong (Pearce (1990)). However, this process should not be seen as costless -- some have argued that environmental regulations lowered productivity growth in the U.S. in the 70’s and 80’s (Jorgenson and Wilcoxen (1989)).

In the developing worid, deforestation, soil erosion, and pollution have imposed significant economic costs, both measured and unmeasured. It is conceptually unclear whether higher economic growth worsens or improves the environment. The tradeoff in welfare between conventional income and environmental quality is also unclear (and may differ across countries or across income levels). While higher growth implies higher growth in demand for exhaustible resources, it also may imply a shift away from use of exhaustible resources. For example, deforestation in the Sahel and the Philippines is associated with consumption of fuelwood by the poorest segment of the population -- increased income could lead to substitution of less environmentally costly forms of energy for fuelwood. Rising income could also lead to greater demand for environmental preservation.”

# 2. Persistence of growth rates

A surprising fact is the low persistence of countries’ growth performance across periods, as mentioned in the first section. Table 5 shows the cross-section correlation between growth in subsequent decades to be around .3. This captures the persistence of relative performance, since the correlation is with respect to deviations from the average for ail countries. In other words, this correlation measures the degree to which being an above-average performer one period is a good predictor of being an above-average performer the following period. Since this correlation is with respect to the period average, it removes any common global trends in growth rates. Several hypotheses could explain the low persistence of relative performance.

Policies. While policy regimes are commonly thought to be highly persistent, this is not true for all policies, as shown in table 5. The government current expenditure variables -- consumption and education spending -- are the most persistent, far more so than growth.

> See the useful survey of Pearce (1990) and the heuristic treatment of Anderson (1990).

5'We have worked cui an example in which natural resources (assumed to be in fixed supply) not used in production enter the utility function. Sustained growth requires that the elasticity of substitution in production between reproducible inputs (capital) and natural zeroresourcesin thebeoptimalgreaterplan,thani.e.one.all naturalWith a Cobb-Douglasresources are preserved utility function,for theirtheutilityuse ofvalue.naturalWhetherresourcesthe marketin productioncan replicategoes theasymptoticallyoptimal plan to depends on appropriate pricing of natural resources.