Pollution Haven Hypothesis
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The pollution haven hypothesis posits that, when large industrialized nations seek to set up factories or offices abroad, they will often look for the cheapest option in terms of resources and labor that offers the land and material access they require. However, this often comes at the cost of environmentally unsound practices.
Developing nations A developing country is a sovereign state with a less-developed industrial base and a lower Human Development Index (HDI) relative to developed countries. However, this definition is not universally agreed upon. There is also no clear agreemen ...
with cheap resources and labor tend to have less stringent environmental regulations, and conversely, nations with stricter environmental regulations become more expensive for companies as a result of the costs associated with meeting these standards. Thus, companies that choose to physically invest in foreign countries tend to (re)locate to the countries with the lowest environmental standards or weakest enforcement.


Three scales of the hypothesis

#
Pollution control Pollution is the introduction of contaminants into the natural environment that cause harm. Pollution can take the form of any substance (solid, liquid, or gas) or energy (such as radioactivity, heat, sound, or light). Pollutants, the component ...
costs have an impact at the margins, where they exert some effect on investment decisions and trade flows. #Pollution control costs are important enough to measurably influence trade and investment. #Countries set their environmental standards below socially-efficient levels in order to attract investment or to promote their exports. Scales 1 and 2 have empirical support, but the significance of the hypothesis relative to other investment and trade factors is still controversial. One study found that environmental regulations have a strong negative effect on a country's FDI, particularly in pollution-intensive industries when measured by employment. However, that same study found that the environmental regulations present in a country's neighbors have an insignificant impact on that country's trade flows.


Formula and variations

:Yi = αRi + XiβI + εi In the above formula, Y is economic activity, R is regulatory stringency, X is an aggregate of other characteristics that affect Y and ε is an
error term In mathematics and statistics, an error term is an additive type of error. In writing, an error term is an instance of faulty language or grammar. Common examples include: * errors and residuals in statistics, e.g. in linear regression * the error ...
. Theoretically, by changing your value of R, analysts will be able to calculate the expected effect on economic activity. According to the Pollution Haven Hypothesis, this equation shows that environmental regulations and economic activity are negatively correlated, because regulations raise the cost of key inputs to goods with pollution-intensive productions and reduce jurisdictions' comparative advantage in these goods. This lack of comparative advantage causes firms to move to countries with lower environmental standards, decreasing Y. There is also an expanded formula, as shown below: :Yit = vi + αRit + γTit + θRitTit + X’βit + εit This expanded formula takes into account whether
trade liberalization Free trade is a trade policy that does not restrict imports or exports. In government, free trade is predominantly advocated by political parties that hold economically liberal positions, while economic nationalist political parties generall ...
(i.e. the level of
trade barrier Trade barriers are government-induced restrictions on international trade. According to the comparative advantage, theory of comparative advantage, trade barriers are detrimental to the world economy and decrease overall economic efficiency. Most ...
s that exist in a country, labeled as T) increases the negative correlation between economic activity (Y) and regulatory stringency (R). Some authors claim that trade barriers disproportionately effect the environment, and this equation attempts to quantify the interaction between trade barriers and regulatory stringency, and the corresponding effect with respect to output in an economy.


Connection with the environmental Kuznets curve

The environmental Kuznets curve (EKC) is a conceptual model that suggests that a country's pollution concentrations rise with development and industrialization up to a turning point, after which they fall again as the country uses its increased affluence to reduce pollution concentrations, suggesting that the cleaner environment in developed countries comes at the expense of a dirtier environment in developing countries. In this sense, the EKC is potentially a reflection of the Pollution Haven Hypothesis, because one of the factors that may drive the increase in
environmental degradation Environment most often refers to: __NOTOC__ * Natural environment, referring respectively to all living and non-living things occurring naturally and the physical and biological factors along with their chemical interactions that affect an organism ...
seen in pre-industrial economies is an influx of waste from post-industrial economies. This same transfer of polluting firms through trade and foreign investment could lead to the decrease in environmental degradation seen in downward-sloping section of the EKC, which models post-industrial (service) economies. This model holds true in cases of national development, but cannot necessarily be applied at a local scale.


Real-world example

Used lead–acid batteries that
Americans Americans are the Citizenship of the United States, citizens and United States nationality law, nationals of the United States, United States of America.; ; Law of the United States, U.S. federal law does not equate nationality with Race (hu ...
turn in to be recycled are increasingly being sent to
Mexico Mexico, officially the United Mexican States, is a country in North America. It is the northernmost country in Latin America, and borders the United States to the north, and Guatemala and Belize to the southeast; while having maritime boundar ...
, where the lead inside them is extracted by crude methods that are illegal in the United States. In 2009, the Environmental Protection Agency significantly tightened
National Ambient Air Quality Standards The U.S. National Ambient Air Quality Standards (NAAQS, pronounced ) are limits on atmospheric concentration of six pollutants that cause smog, acid rain, and other health hazards. Established by the United States Environmental Protection Agency ...
for lead pollution, which made domestic recycling more difficult and expensive in the United States, but did not prohibit companies from exporting the work and danger to countries where environmental standards are low and enforcement is lax. Following this change, exports of used lead-acid batteries increased four-fold, which was followed by a significant increase in babies born with low birth weight to mothers living within a radius of Mexican battery-recycling plants. In this sense, Mexico serves as a pollution haven for the United States battery industry because Mexican environmental officials acknowledge that they lack the money, manpower, and technical capacity to police the flow. According to ''
The New York Times ''The New York Times'' (''NYT'') is an American daily newspaper based in New York City. ''The New York Times'' covers domestic, national, and international news, and publishes opinion pieces, investigative reports, and reviews. As one of ...
'' in 2011, 20% of spent American vehicle and industrial batteries were being exported to Mexico, up from 6% in 2007, meaning that approximately 20 million batteries would cross the border that year. A significant proportion of this flow was being smuggled in after being mislabeled as metal scrap. The world map shown here illustrates how e-waste dump sites (or sites where citizens or multinational corporations of industrialized nations dump their used electronic devices) along with the GDP PPP per-capita of those countries. While GDP PPP per-capita is not a perfect indicator of economic development, and e-waste dump sites are only one small facet of what could be a greater pollution haven, this map does illustrate how e-waste dump sites are often located in poorer, relatively pre-industrial nations, which provides some rudimentary support for the Pollution Haven Hypothesis. Despite e-waste sites in South America there is more to look into, the East Asia area where most of the global manufacturing happen. Foreign companies will relocate factories to operate in areas where there is minimal environmental regulations, saving money on waste disposal and labor. Guiyu, a city in China that turned into a hub for electronic waste (e-waste) processing, attracting waste from developed countries due to its lack of environmental regulations and cheap labor. Informal recycling operations led to significant environmental contamination, with water samples showing lead levels 190 times higher tha
World Health Organization safety standards
Approximately 80% of children in Guiyu suffered from lead poisoning, illustrating the health impacts on vulnerable populations. In 1979, Asia Rare Earth (ARE), partly owned b
Mitsubishi Chemical Industries Ltd
established a rare earth extraction plant i
Bukit Merah, Perak, Malaysia
The facility began operations in 1982, extracting
yttrium Yttrium is a chemical element; it has Symbol (chemistry), symbol Y and atomic number 39. It is a silvery-metallic transition metal chemically similar to the lanthanides and has often been classified as a "rare-earth element". Yttrium is almost a ...
from monazite, a process that produced radioactive waste. The disposal of this waste led to severe environmental contamination, resulting in health issues among local residents.
Mitsubishi The is a group of autonomous Japanese multinational companies in a variety of industries. Founded by Yatarō Iwasaki in 1870, the Mitsubishi Group traces its origins to the Mitsubishi zaibatsu, a unified company that existed from 1870 to 194 ...
is one of the top Japanese company that makes vehicles and their cars are manufactured in many countries like Japan, Thailand, Indonesia, China, the Philippines, Vietnam, and Russia. Clearly Malaysia is not among the list and their intention of operating mines of extracting radioactive chemicals materials at Malaysia is clear, for the advantage of the lack of environmental regulations.


Areas of controversy

The first area of controversy with respect to the Pollution Haven Theory has to do with the formulas above. Finding an appropriate measure of regulatory stringency (R) is not simple, because we want to know how much more costly production is in a given jurisdiction relative to others due to that jurisdiction's environmental regulations. The compliance costs stemming from these regulations, however, could come in the form of environmental taxes, regulatory delays, the threat or execution of lawsuits, product redesign, or emissions limits. This proliferation of cost styles makes R hard to quantify. Another major critique of the second formula is that it is difficult to measure regulatory stringency and trade barriers because the two effects are likely endogenous, so few studies have attempted to estimate the indirect effect of trade liberalization on pollution havens. Furthermore, governments at times engage in inefficient competition to actually attract polluting industries through weakening their environmental standards. However, as per conventional economic theory, welfare-maximizing governments should set standards so that the benefits justify the costs at the margin. This does not mean that environmental standards will be equal everywhere, as jurisdictions have different assimilative capacities, costs of abatement, and social attitudes regarding the environment, meaning heterogeneity in pollution standards is to be expected. By extension, this means that industry migration to less stringent jurisdictions may not raise
efficiency Efficiency is the often measurable ability to avoid making mistakes or wasting materials, energy, efforts, money, and time while performing a task. In a more general sense, it is the ability to do things well, successfully, and without waste. ...
concerns in an economic sense. A final area of controversy is whether the Pollution Haven Hypothesis has empirical support. For example, studies have found
statistically significant In statistical hypothesis testing, a result has statistical significance when a result at least as "extreme" would be very infrequent if the null hypothesis were true. More precisely, a study's defined significance level, denoted by \alpha, is the ...
evidence that countries with poor air quality do have higher net factor exports of coal, but the magnitude of the impact is small relative to other variables.
Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American New Keynesian economics, New Keynesian economist who is the Distinguished Professor of Economics at the CUNY Graduate Center, Graduate Center of the City University of New York. He ...
, a
Nobel Prize The Nobel Prizes ( ; ; ) are awards administered by the Nobel Foundation and granted in accordance with the principle of "for the greatest benefit to humankind". The prizes were first awarded in 1901, marking the fifth anniversary of Alfred N ...
–winning economist, is skeptical as to whether pollution havens have empirical support in economic theory, as he writes, "At this point it's hard to come up with major examples of industries in which the pollution haven phenomenon, to the extent that it occurs, leads to international negative externalities. This does not, however, say that such examples cannot arise in the future." Scale 3 above has had empirical arguments made specifically against it, especially in the last 20 years. Some economists argue that once higher environmental standards are introduced in a country, larger multinational firms present in the country are likely to push for enforcement so as to reduce the cost advantage of smaller local firms. This effect would make countries with strict environmental standards a haven for the large companies often associated with higher levels of pollution, meaning the polluting agents may be smaller companies, rather than the larger MNCs as theorized by other proponents of the Pollution Haven Hypothesis.


See also

* Environmental dumping *
Environmental racism Environmental racism, ecological racism, or ecological apartheid is a form of racism leading to negative environmental outcomes such as landfills, Incineration, incinerators, and hazardous waste disposal disproportionately impacting Community ...
* Fenceline community *
Global waste trade The global waste trade is the international trade of waste between countries for further treatment, disposal, or recycling. Toxic or hazardous wastes are often imported by developing countries from developed countries. The World Bank Report '' ...
*
Locally unwanted land use In land-use planning, a locally unwanted land use (LULU) is a land use that creates externality costs on those living in close proximity. These costs include potential health hazards, poor aesthetics, or reduction in home values. LULUs often grav ...
*
Pollution in China Pollution in China is one aspect of the broader topic of environmental issues in China. Various forms of pollution have increased following the industrialisation of China, causing widespread environmental and health problems. Jared Diamond, '' ...
*
Race to the bottom Race to the bottom is a Socioeconomics, socio-economic concept describing a scenario in which individuals or companies compete in a manner that incrementally reduces the utility of a product or service in response to perverse incentives. This pheno ...
* Summers memo * '' Trading Up'' (book) * Toxic colonialism


References

{{globalization Environmental economics Economic globalization Development economics Human ecology Global inequality Environmental social science concepts Environmental racism