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The World Bank’s World Development Report 1992 (IBRD, 1992) was subtitled ‘Development and Environment’. It noted that, ‘The view that greater economic activity inevitably hurts the environment is based on static assumptions about technology, tastes and environmental investments. If we consider, for example, the per capita emissions of some pollutant into the environment, e, and per capita income, y, then the view that is being referred to can be represented as e = a y 
So that e increases linearly with y, as shown in Figure. Suppose, alternatively, that the coefficient a is itself a linear function of y: a = ßO – ß1
Then, substituting the latter equation into the former gives the relationship between e and y as: e = ß0y – ß1 y2 
The relationship between Environmental impacts and Income is depicted in the Graph below

 

e = a y 

 

   

            e = ß0 y – ß1 y

For ß1 sufficiently small in relation to ß0 , the e/y relationship takes the form of an inverted U, as shown in the second figure. With this form of relationship, economic growth means higher emissions per capita until per capita income reaches the turning point, and thereafter actually reduces emissions per capita. 
It has been hypothesised that a relationship like that shown in the second Figure holds for many forms of environmental degradation. Such a relationship is sometimes called and Environmental Kuznet’s Curve’ (EKC) after Kuznet’s (1955), who hypothesised an inverted U for relationship between a measure of inequality in the distribution of income and the level of income. If the EKC hypothesis held generally, it could imply that instead of being a threat to the environment as argued in The Limits to Growth, economic growth is the means to environmental improvement. That is, as countries develop economically, moving from lower to higher levels of per capita income, overall levels of environmental degradation will eventually fall.

However this inverted U relationship holds good only for certain pollutants and is not applicable for long term pollutants like greenhouse gases and ozone depleting substances which are primarily emitted by developed countries. Economic growth alone is insufficient to induce environmental improvement and earths’ resource base is incapable of supporting infinite economic growth. 


Evidence on the EKC Hypothesis 
Numerous studies have been carried out to empirically test the EKC Hypothesis. Shafik and Bandyopadhyay (1992) estimated the coefficients of relationships between environmental degradation and per capita income for ten different environmental indicators as part of a background study for the World Development Report 1992 (IBRD, 1992). The indicators are: lack of clean water, lack of urban sanitation, ambient levels of suspended particulate matter in urban areas, urban concentrations of sulphur dioxide, change in forest area between 1961 and 1986, the annual rate of deforestation between 1961 and 1986, dissolved oxygen in rivers, faecal colioforms in rivers, municipal waste per capita, and carbon dioxide emissions per capita. Their studies showed that the quality of air declined uniformly with increasing income. Both measures of deforestation were found to depend on income. River quality tended to worsen with increasing income. But however CO2 emissions, a major contributor to the ‘green house gases’ and municipal wastes did not rise unambiguously with income. 

Panayotou (1993) investigated the EKC hypothesis for sulphur dioxide, Nitrous oxide, suspended particulate matter and deforestation. All the fitted relationship was found to be consistent with the EKC hypothesis. This was also explored by Stern et al (1996) who also critically review the literature on the existence of meaningful EKC relationships. The evidences on the whole conclude that Economic growth is not a panacea for environmental quality.

 

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