Interaction between environment and economic growth

Malović, Marko (2014) Interaction between environment and economic growth. In: Toward green economy: opportunities and obstacles for Western Balkan countries. Xlibris Publishing, Bloomington, pp. 19-31. ISBN 978-1-503532-946

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Abstract

In order to keep up even the present (already crisis stricken) trend of economic growth, by 2050 mankind would have to consume three times the quantity of biomass, mineral and fossil fuels as well as ores per annum than it consumes today, with proverbially drastic gap between consumption of developed vs. developing, resource-abundant vs. resource-constrained economies, along with global consequences for the environment and bio-economic constellation in which we are to leave our posterity. In contrast, relevant UN institutions have been warning for years that under current demographic developments (10 billion people by 2050) and rising economic welfare in key parts of the emerging world additional progression in annual and per capita consumption of non-renewable or slowly and hardly renewable natural resources simply doesn't represent a viable option any longer.Finally, for small open economies in transition, Gordian knot of simultaneous tackling environment protection, balanced regional growth, poverty reduction, favourable birth rate, attractiveness for foreign investors and snappy rural development, definitely becomes ever more tightened and entangled than ever before. Over the last 60 years world economy has lost around 20% of top notcharable land, fifth of its rain forests and thousands of plant- and wild-life species, while CO2 emissions together with other human agents have pierced the ozone layer and caused the greenhouse effect[Haider Zaidi, 2008]. Nevertheless, Grossman and Krueger (1995) in their seminal paper from the end of XX century were the first to realize that continuous or even accelerating economic growth does not result (at least not inevitably) in pro rata pollution increase and worsening environment quality. As a matter of fact, experiments of an array of researchers thereafter confirmed a concave parabolic shape of relationship between pollution cum resource depletion (on ordinate) and economic growth i.e. income (on X axis), relationship which for its resemblance with Kuznets’s (1955) findings5 in respect to income inequality trajectory in developing economies was dubbed Environmental Kuznets Curve (EKC). This paper reviews theoretical paradigms and empirical investigation of topsy-turvy relationship between environmental policies (or lack thereof) and economy's growth efforts. By utilizing EKC, Green Solow and alike frameworks we reexamine the environmental triangle of varying 1)activity scale, 2)output composition in terms of cleanliness or outsourcing and 3)production/abatement technology advances for growth dynamics in a small open economy. After introducing the problem of internalization distribution of externalities, this research briefly reflects on theoretical insights a propos EKC and variations of its empirical verification, only to move on to specific ingredients of environmentally sustainable growth path, including international trade and globalization impact, as well as ecological standards imposed by aspiring EU accession. First of all, the paper deals with prerequisites and determinants of inverted U-shaped curvature of EKC, followed by instruments at disposal of economic policy makers to that end, notwithstanding foreseeable investment induced by politeconomic and ecological trends in Western Balkans. The rest of the paper is organized as features: Section 2 reviews theory and policy ofenvironmental externalities and determinants of concavity of EKC relationship.Section 3 deals with origins of green growth for small open economy (emphasizing ways to reach negative slope of EKC more quickly and enhance its concavity), with special attention paid to impact of environmental policies on international trade flows, globalization of investment and plant location. Section 4 goes on to conclude what lies ahead for small open economies of W. Balkans in terms of interaction between environment and their economic growth, followed by bibliographical register at the very end.

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