This paper revolves around the review of related literature involving the robustness of the Environmental Kuznets Curve. This economic theory discusses the relationship turning point of environmental degradation with respect to economic growth. The hypothesis was introduced by Grossman and Kreuger who developed a reduced-form approach to embody the linear correlation of economic growth to environmental quality. Further studies have tested and enhanced this theory by tweaking either or both sides of the equation. Environmental degradation and economic growth are represented by subjective indicators which are based on the findings and beliefs of the various authors. Most of the results gave positive feedback but they still concluded that there are other factors affecting both which are sometimes immeasurable.
Review of Related Literature
The Environmental Kuznets Curve (EKC) hypothesized an “inverted U-shaped” graph representing a positive correlation between economic developments and environmental degradation in short-term setting but when a certain per capita income is breached in the long run, a turning point will emerge and the correlation will be reversed (Cole, 1999). The relationship of environment and economic growth was conceptualized through the paper written by Grossman and Krueger (Agras and Chapman, 1999). Grossman and Krueger (1992) measured economic growth by using GDP per capita, Trade: (X+M)/GDP, and population density against two major environmental indicators which were air pollution (via measurement of sulfur dioxide and suspended particulate matter) and water pollution (via oxygen regime of aquatic life, pathogenic contamination, and heavy metal discharge) but the variables were further expanded latter in their 1995 study. Using ‘reduced-form’ approach, the authors concluded how most indicators reacts from economic growth was at first signs of deterioration but was followed by a phase of improvement (Grossman and Krueger, 1995). Most indicators had their turning point when the country’s per capita income reached $8,000 and by $10,000, there was a slowdown of environmental deterioration (Grossman and Krueger, 1995). Therefore, the more a country prospers, the more will they implement strict enforcement of environmental standards and laws; on another point, developed countries would transfer their ‘pollution-intensive goods’ to more impoverish countries (Grossman and Krueger, 1995).
Aside from the aforementioned study, there are numerous studies done in testing the EKC hypothesis (Shafik and Bandyophyay, 1992; Selden and Song, 1994; Holtz-Eakin and Selden, 1995; Panayotou, 1993; Suri and Chapman, 1998). These EKC econometric studies were improved and tweaked in order to capture a broader perspective on the soundness of the EKC framework. Agras and Chapman (1999) and Cole (1998) have summarized those studies and incorporated other factors into their work as well. The equation is further expanded by either adding more environmental indicators and economic indicators and even upsizing the type of data usage (time series, cross-country, and panel data). Examples would be adding nitrogen, CO2 emissions, per capita energy etc. while on the other side of the equation, economic growth were represented by investment shares, income growth etc. Continuous testing is being done for the study to become robust.
Agras and Chapman (1999) have added per capita energy consumption and CO2 which also displayed statistically significant results against GDP but trade variables were insignificant. A clear divide was seen between the behavior in developing and developed countries, turning point for per capita energy was calculated at $62,000 along with natural resource base and energy efficiency (Agras and Chapman, 1999). Conflicting dynamics of the EKC was found in the inverted- U shape of the model in Agras and Chapman (1999), developing countries displayed increasing environmental degradation per capita GDP by increased levels of industrialization, export-led growth, and decreased level of agricultural base expansion and pollution control devices. Meanwhile, developed countries had improving environmental quality by decrease in imports and shift in service industries (Agras and Chapman, 1999). These findings are in sync with the conclusion made by Grossman and Krueger (1995) where richer and poorer countries reflected the behavior of environmental conditions in association with their concept of economic growth. Despite the positive feedback, the authors agreed that regardless the level of country’s development, the government needs to carry out policies more inclined to economic development and technological innovation in order to preserve Mother Nature as well as raise environmental hazard awareness (Grossman and Kreuger, 1995 and Agras and Chapman, 1999).
In a critique by Torras and Boyce (1998), the results were hinge with political economy. The model of Grossman and Krueger had the ‘industrial-composition effect and ‘induced policy response which were biased towards industrialized and richer countries hence leaving developing and low-income countries with the burden of ‘environmental dumping,’ thereby finding a loophole in the model thus adding income inequality to the equation. On another study by Cole (1998), he introduced the concept of sustainable development which discusses the quantitative limitation of economic growth rather the constant quality of growth because developed countries will not always remain as such and many are in the emerging market category. Cole (1998) also deduced the decoupling of certain environmental indicators from economic growth. He stated that the relationship of environmental degradation with economic growth needs to be interpreted carefully due to different pollution emissions and concentrations specifically from the impact of the transport sector (Cole, 1998). Another point of focus was the local versus global pollutant which displayed disparity in the effect of economic development in developed countries attributed to environmental and technological remedies (Cole, 1998).
As evident in the studies mentioned above, the EKC hypothesis needs to be cautiously examined. Although the theory is widely improved and developed, empirical testing has been repeatedly tested through the course of time. There’s no straightforward conclusion that a turning point will hold true consistently and for some, it may become a cycle. Both environmental and economic indicators are not always statistically significant. The paucity of environmental indicators must be taken into account. Cole (1998) stated there are immeasurable indicators which cannot be statistically estimated such as “soil erosion, desertification, biodiversity loss, pollution and depletion of groundwater aquifers and many, many more.” On the other hand, in terms of economic growth, it is not always consistent hence the measurement of per capita income may not be robust enough to imply economic growth and for some, trade indicators has low statistical significance with environmental quality. Further literatures are needed to test EKC hypothesis and if certain environmental factors become available in Global Environment Monitoring System (GEMS) to assess environmental degradation, the more the relevance of EKC theory. Meanwhile, economic indicators should also take into consideration measures of technological innovation, government environmental policies, and many more.
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