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Article Excerpt
I. INTRODUCTION
Among the more controversial views about economic growth and globalization is that both will eventually benefit the environment (Arrow et al. 1995). In part, this view is predicated on the nature of structural changes that are normally associated with trade liberalization and economic development. More specifically, economic growth and the shift of production away from polluting sectors and "dirty" technologies help to arrest the deterioration in the environment. In addition, environmental quality is a normal good, and wealthier economies will invest more heavily in environmental improvements and cleanup. According to this line of argument, another implication is that developing countries inevitably focus first on manufacturing production and basic forms of production while tolerating some degradation in the quality of the environment. Compounding this feature is the fact that the political pressures associated with industrialization are also likely to be influential. The factor owners employed in manufacturing industries lobby for less regulation of polluting activities. This accelerates the decay of the environment.
With the inevitable economic decline of basic manufacturing activities in more mature economies, the declining significance of basic manufacturing in industrialized countries may very well create social pressures that reduce the demand for pollution abatement. For instance, it has been argued that greater inequality of wealth and income could be bad news for the environment (see Boyce 1994; Torras and Boyce 1998). Other studies show that the pattern of sectoral resource ownership matters and that greater income inequality can yield either stricter or weaker environmental policies. For example, McAusland (2003) showed that the owners of clean factors of production may be less green voters because they may bear the burden of pollution taxes through adverse terms of trade effects on the production of "clean goods." However, in this paper, we propose the argument that associated with falling industrial wages may be declining political influence exercised by the factor owners in the polluting manufacturing industries of the economy. These latter features are likely to be manifested in the political process, that is, voting for change and a cleaner environment. In other words, structural change may not only involve less reliance being placed on the use of polluting inputs but also have the signal virtue of altering the demand for environmental policies.
More liberalized trade and the rapid onset of skill-biased technological change have been linked with the declining real incomes received by production workers in manufacturing industries. (1) Free trade raises national income which, in aggregate terms, increases the value placed on the environment. Political economic considerations are therefore likely to lead to a cleaner environment. Trade liberalization, which some authors continue to associate with increasing income inequality in Organisation for Economic Co-operation and Development (OECD) countries, may therefore be a "pro-environment" policy (see Bommer and Schulze 1999; Grossman and Krueger 1993, for instance).
Associated with this relatively sanguine view has been an empirical relationship--in the form of an inverted U-shaped curve-between per capita income and various measures of environmental degradation. The relationship, or the environmental Kuznets curve, has been investigated for a wide variety of environmental indicators (e.g., Dinda 2004, Grossman and Krueger 1995; Selden and Song 1994; Shafik 1994). For any country, the implication is that economic growth will be associated with environmental degradation until a "critical" level of per capita income is attained; from that point, there will be an improvement in environmental conditions.
Of course, the turning points in the relationship between economic growth and environmental quality can be affected by the policies implemented by decision makers (Grossman and Krueger 1995; Shafik 1994). Consequently, different political processes do not all imply that societies will grow their way out of environmental problems or that policies that promote economic growth can substitute for environmental policies.
This paper is also indirectly related to the political economy literature that deals with the effect of income inequality on redistributive policies and economic growth (e.g., Alesina and Rodrik 1994; Persson and Tabellini 1994; Saint Paul and Verdier 1996). A standard argument is that when income is more unequally distributed, the median voter is likely to be relatively less endowed with capital, either physical or human, and to thus favor a higher rate of capital taxation. A similar argument may well apply to pollution abatement policies. For instance, if the median voter is a low-income worker who receives their livelihood from supplying labor to the basic manufacturing or pollution-intensive sectors, then greater income inequality may be associated with damage to the environment because it reduces the demand for pollution abatement.
However, while environmental policies are shaped by the importance of potentially affected constituencies, the relative political importance of different constituencies is likely to change over time. The idea of an interaction between industry decline and endogenous policy formation is not a novel one, of course (e.g., Cassing and Hillman 1985). However, the perspective explored here is that the declining economic significance of polluting sectors in a developed economy is likely to be associated with greater income inequality. In turn, this is likely to reduce the "political clout" of the factor owners in the polluting sectors. In particular, as the workers in these sectors of the economy become less important economically, as reflected by their falling real incomes and falling employment levels, they also become less influential politically. (2) Consequently, a regulator, motivated by political considerations, will increase the stringency of environmental regulations. Of course, dynamic comparative advantages dictate that mature, developed economies shift resources away from basic manufacturing activities.
In the next section, we set out a simple model and derive some results that highlight the relationship between the sectoral decline of manufacturing and the stringency of environmental policies. In Section III, we present different types of empirical evidence to test the key findings of our model. First, we show that deindustrialization may have a "silver lining" in terms of reducing emissions from basic manufacturing activities. Specifically, we show that organic water pollution and industrial employment levels are close complements. Second, we investigate whether labor market institutions that have traditionally supported blue-collar interests and lowered the inequality of earnings affect the environmental regulation of industry. (3) We show that a greater degree of union coordination of wage bargaining is strongly linked to the observed pattern of environmental taxation of industry relative to households. We conclude Section III with a careful econometric study of panel data. In particular, we use extreme bounds analysis (EBA) to examine whether countries with greater income inequality and declining manufacturing employment have more stringent environment policies. The last section concludes.
II. THE MODEL
Consider an economy with two types of jobs: "blue collar" and "white collar," say. Further, assume that pollution creates blue-collar jobs (e.g., manufacturing) only. (4) All other jobs are white collar (e.g., services, high tech). Pollution afflicts all workers, however. A policymaker must reconcile the conflict between blue-collar jobs and environmental quality while also seeking the support of both groups of workers.
To make matters transparent, assume that the economy has a unit mass of each of two types of workers--blue-collar workers, indexed by b, and white-collar workers, indexed by w. For expositional purposes, we assume that white-collar workers are always employed. Blue-collar workers can be in one of two states at time t, employment (e) or unemployment (u). Workers receive income [y.sup.i.e.sub.t] if they work, i = b, w. If unemployed, blue-collar workers, receive income [y.sup.b,u.sub.t]. We assume that the {[y.sup.i,j.sub.t]} are deterministic processes beyond the decision maker's control. (5) If worker i supplies one unit of labor inelastically each period, [y.sup.i.e.sub.t] can be interpreted as the wage rate in period t for worker i.
At time t, manufacturing generates a residual called pollution, [s.sub.t]. Pollution and blue-collar labor are complementary inputs (see Cropper and Oates 1992). If the policymaker wants industry to create more blue-collar jobs, he must allow greater production--and pollution. The demand for blue-collar workers is given by [l.sup.b.sub.t] = f([y.sup.b,e.sub.t], [s.sub.t]), with
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII].
The pollution stock, [p.sub.t], decays at rate [delta] [member of] [0, 1]. The transition equation is
[p.sub.t+1] = (1 - [delta])[p.sub.t] + [s.sub.t].
Equating [delta] to 1 gives the classic case of a pollutant that dissipates immediately; [delta] = is the case for a pollutant that never dissipates. The utility for worker i is given by the concave function U([y.sup.i.sub.t], [p.sub.t]), for i = b, w. That is, all workers suffer from [p.sub.t].
In traditional political economy models, it is assumed that the policymaker maximizes a weighted average of the welfare of constituents over his career. The policymaker might be a politician who considers voter welfare to win elections, or he might be a regulator who considers constituent welfare to win promotions. In the current context, the political weights that a policymaker assigns to the welfare of blue- and white-collar workers may reflect the relative political influence of the two types of workers. Different weights may be attributed to interest groups according to the degree of organization or unionization or may simply vary with size of membership, for instance.
The common agency model developed by Bernheim and Whinston (1986), and applied by Grossman and Helpman (1994), provides microeconomic foundations for the political weights that are assigned to each interest group in a society. Grossman and Helpman showed that if policymakers, when choosing a policy (s, say) care about interest groups' welfare ([V.sup.j](s)) on one hand and about campaign contributions on the other hand, then they actually end up maximizing a weighted sum of the interest groups' objective functions. That is, the policymaker will choose a policy s to maximize
(1) [V.sup.g](s) = [[summation over (j[member of]I)]([I.sup.j] + [[alpha].sup.j])[V.sup.j](s),
where [V.sup.g](s) denotes the policymaker's welfare function, I is the set of all interest groups, the indicator function, [I.sup.j] equals 1 if the interest group is engaged in lobbying activities, and [I.sup.j] = otherwise. (6)
Grossman and Helpman concentrated on studying the distortionary effects of lobbying and assumed that each group is originally given the same weight [[alpha].sup.j] = [alpha], j [member of] I. From Equation (1), it is clear that despite the presence of lobbying, the outcome will be equal to the efficient solution selected by the utilitarian social planner that would assign equal weights to everybody. The political system creates inefficiencies when some groups in the economy do not lobby....
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