Is liberalization of trade good for the environment? Evidence from India

Kakali Mukhopadhyay () and Debesh Chakraborty ()
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Kakali Mukhopadhyay: School of Environment, Resources and Development (SERD), Asian Institute of Technology, Pathumthani, Thailand
Debesh Chakraborty: Department of Economics, Jadavpur University, Calcutta, India

Asia-Pacific Development Journal, 2005, vol. 12, issue 1, 109-136

Abstract: A policy of trade liberalization is often suggested as a means of stimulating economic growth in developing countries. Given the potential benefits of trade liberalization policies, it is important to examine whether such policies are in fact in conflict with the environment as they accelerate economic growth. Two conflicting hypotheses emerge from the trade-environment debate. The first competing hypothesis states that increasing trade may encourage developing countries with weaker environmental protection to specialize in industries that create more pollution. This is referred to as the pollution haven hypothesis (PHH); the second hypothesis, known as the factor endowment hypothesis (FEH), predicts that trade liberalization will result in trade patterns consistent with the Heckscher- Ohlin-Vanek (HOV) theory of comparative advantage based on factor endowment differentials. The manifestation of PHH is in direct conflict with FEH. The present paper aims at testing both hypotheses, PHH and FEH, for India’s trade with the rest of the world and the European Union (15) during the 1990s when radical economic reforms were introduced. The input-output method is used and suitably modified to test both the hypotheses considering three pollutants, carbon dioxide, sulphur dioxide and nitrogen dioxide (CO2, SO2 and NOx). It is clear from the results that import-related pollution is much greater than the export-related pollution for India. The findings of the present work challenge the pollution haven hypothesis, arguing that liberalization of trade policy in India has not been associated with pollution-intensive industrial development. On the other hand, the study supports the factor endowment hypothesis thus confirming that the export-oriented labour requirements are much more in weight than its import counterpart. Hence India gains in terms of emissions from trade in both cases. The paper also suggests several policies.

Date: 2005
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