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Table of Contents
  1. 1. Introduction
  2. The Impact of International Trade and FDI on Economic Growth and Technological Change
  3. The impact of foreign direct investment on developing economies and the environment
  4. Global Economy Journal
  5. Services on Demand

Buy Softcover. FAQ Policy. About this book Economic globalisation and technological change are the two issues that concerned people in the past, concern them today and will concern them in the future - all over the world, poor or rich.

Show all. Show next xx. Recommended for you. PAGE 1. Lahiri proposes the following model, which introduces environmental considerations to standard analyses of gain and losses from international trade. This model is especially interesting because it gives a very good explanation to what the effect of capital mobility is and its effects on environmental quality in any given open economy.

Standard analyses of gains and losses from international trade use the income of the nations as determinant of welfare. Evolution of environmental quality is another important component of social welfare and the present analysis adds this dimension to the outcome of international trade. Empirical studies driven primarily by cross-sectional variation have found an inverted U shaped relation between income and environmental quality, especially for local pollutants which is called the Environmental Kuznets curve henceforth EKC.

This has raised questions whether growth in income has a negative or positive impact in environmental quality. These empirical studies have not incorporated the effect of international trade and growth in any given economy. The model investigates if the EKC relation is also a given property of open economy growth in the long run and what are the forces involved in the income-environment relation. In order to achieve this, it is considered the trading partners to be different either in environmental policy regime or in the stage of growth when they enter trade.

Allowing for the standard sources of comparative advantage in the form of the two economies having different relative endowments of the internationally immobile resource only shifts the environmental-income relation but does not change the inter temporal properties derived here. The model finds that if the environmental policy does not respond to the stronger valuation of pollution disutility as the residents get richer, then the environmental quality monotonically worsens as the income increases. So, if environmental policy becomes stricter with growth of the economy, the environmental quality first worsens and then improves as income gets better.

At early stages of economic development, production grows rapidly to meet the strong investment demand under regulated and deregulated taxation regimes. The difference in shape occurs because if emission taxes are high at later stage of growth, this provides incentives to producers to reduce the emission per unit of production and move to cleaner sectors where the pollution tax payment is low.

These two effects gradually start dominating the growth effect as capital accumulation slows down when the economy gets closer to a steady state.

1. Introduction

This improvement in environmental quality can be seen in the downward segment of the EKC. When the policy regime is so relaxed that emissions taxes do not increase with growth, these two pressures are absent and as a result environmental quality worsens monotonically. The model considers two economies that would have experienced an identical incomepollution trajectory with growth under autarky, and founds that in the context of international trade, the economy that enters trade at an earlier stage of growth is faced with a worse environmental outcome than the one that enters trade at a later stage in development and also experiences a better environmental quality compared to autarky.

This happens because at every point in time, the poorer economy, whatever is its level of growth, values pollution less than its rich partner and it is eager to accept foreign capital that flows wherever returns are higher. Although the returns on the foreign capital are remitted abroad, the effect of the pollution remains in the poorer economy. In this case, it would be misguided for less developed countries, at any given income level, to expect environmental quality to be the same as what the developed country had enjoyed at an identical income level. The model makes it clear that the majority of the studies on EKC are empirical in nature, looking at environmental outcomes being explained by income and some other explanatory variables.

The few existing theoretical studies are constrained in one or more of the following dimensions: are static in nature, do not explicitly model the environmental policy, consider a single production commodity or consider closed economies. These constrain the models from capturing one or more of the growth, intensity, composition or trade effects. This model fills this void by allowing these effects to interact in determining the final outcome. Additionally having environmental policy as an endogenous variable in the model, it provides an instrument that may be used to influence these forces; the endogenously determined pollution tax in each country influences the overall shape of the relation as well as determines the exact levels of results.

This happens because the environmental policy affects the payment to capital. This influences the desire to invest every period, and for any given period also determines the allocation of world capital stock between the two economies.

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So the environmental policy has both a dynamic and static role in determining the amount of capital that is accumulated and the location where it is employed, leading to the emission results. While using the inter temporal income-environment relation of one economy to make predictions for another economy, the model considers that one needs to account for the differences in structure of production, techniques of production, stage of development, nature of environmental policy and pattern of trade simultaneously, which is done in a tractable manner in this model.

The Impact of International Trade and FDI on Economic Growth and Technological Change

The model is a dynamic general equilibrium model of a developing country trading with the rest of the world. The dynamic aspect of the model allows analyzing the growth of the economies and the scale effects on environment. Traded commodities are classified into clean and dirty sectors. This allows analyzing the change in the mix in production composition as the system moves towards the steady state.

In this model environmental policy is modelled as a per-unit pollution tax. Change in the pollution tax affects the per unit emission of each good. The spirit of the model is similar to the Ramsey-Cass- Koopman's Neoclassical Growth Model with an endogenous savings rate. This model uses a system of difference equations that arise from the first order conditions of inter temporal welfare maximization, and also uses analytical results and numerical simulation to track the complete time path of income and environmental conditions of the two economies. Evolution of the variables is defined as the movement from the initial conditions to the steady state along the saddle path.

Change in the initial conditions, parameters of the model and the environmental tax rule translate into changes in the intertemporal paths and the relations between variables. These dimensions of the exercise provide a more comprehensive understanding of the economic reasons underlying the Environmental Kuznets Curve. It examines whether and when it is realistic for polluted economies to pin their hope on higher incomes as a solution to improve environmental quality.

A study by Grossman and Krueger discovered the inverted U shaped relation between income and environmental quality for local air and water pollution. This study motivated multiple empirical studies to analyze the EKC. Theoretical papers by Andreoni and Levinson , John and Pecchenino , Jones and Manuelli , Selden and Song and Stokey have derived patterns for the transition path of pollution.

The impact of foreign direct investment on developing economies and the environment

They differ in the forms of the welfare function, the production functions, abatement functions and intergenerational considerations. However, none of them model the impact of international trade and of different environmental policy regimes as important influences on the change in pollution in the context of growth of an economy. Smulders et al construct a dynamic simulation EKC model. In a closed economy scenario, they distinguish subsequent phases when better technologies become exogenously available. Also, the environmental tax structure change exogenously in the different phases.

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These two characteristics affect the profit maximization decision of firms in choosing to adopt the new technology or to continue with the old. This is a dynamic model in which it is examined both exogenous and endogenous changes in tax policy. Also, the technique of production is determined within the model. The interaction between the two trading partners, usually absent in the EKC literature, is an important addition in the analysis.

Starting with two countries that differ in capital and labour characteristics, Copeland and Taylor outline a static framework to examine the implication of trade on each country's production pattern and environmental outcomes. They allow capital to be mobile, so that a country could employ its domestically owned capital abroad. This model starts from this framework and extend it to a dynamic model so that it is suitable for analyzing the intertemporal relation between income and environment for an economy. The differences in initial relative characteristics play a weaker role in this model because in a dynamic context the endogenously determined inter temporal interest rate is the primary determinant of the capital owned by the country.

The endogenously determined pollution tax in each country has both dynamic and static implications in the model. The pollution tax path determines the amount of capital that is accumulated over time, while every period it affects the location where the capital is employed and the intensity of emissions. The interaction of the intertemporal and static effects of the tax determines the final emission outcome in the model. It simplifies the instantaneous utility function to be the log function instead of constant elasticity of substitution in the original RCK framework.

However the consumption package comprises of two goods instead of the single commodity in the RCK model, while the disutility from pollution is added in the welfare function. While the original RCK model was for a closed economy, this model applies it to two country trading framework. In recent research Roe has used this framework to conduct a simulation exercise in an open economy framework in a non environmental context.

Bibliographic Information

He however simplifies the openness of the model by assuming a small open economy trading with the rest of the world at steady state implying constant prices. Also there is no international capital mobility. This model incorporates pollution considerations and international capital mobility in a larger country setting. This model starts with a dynamic a general equilibrium model with two types of goods X t and Y t and two inputs X t and Y t all indexed by time. The every period utility is additive in consumption and pollution.

The inter temporal social welfare function is:. Although the disutility parameter associated with pollution is constant, the marginal valuation of disutility increases as economies get richer. This can be seen from the ratio of the marginal utilities. If is P z,t the marginal valuation of pollution, and P t is the marginal valuation of consumption, then. The emission tax is available as the instrument to maximize social welfare. Three different policy regimes are considered. First, as in the static model, the pollution tax is assumed to be set efficiently as the shadow price of pollution each period in both economies.

This is more realistic for developed economies where wealthier residents, who are more aware of the cost of environmental degradation, can expect the policy making agency to reflect their concerns through stricter regulations. However for economies with fewer resources, the cost of monitoring as well as the administrative costs of changing the standards may make periodic synchronization of pollution tax with consumer demands infeasible.

Hence the second pollution tax framework is such that one economy sets efficient pollution tax every period, while the other economy keeps its pollution tax fixed for the period under consideration, zero environmental taxes being a special case of this fixed-tax. This may be a more realistic institutional set up if one identifies the efficient-tax economy as the developed countries and the fixed-tax economy as the less developed countries.

A third scenario considered is one where the emissions tax in one economy is rising with growth, but not sufficiently to reflect the entire marginal valuation of pollution disutility. Production of each commodity uses one specific physical input, and emits pollution Z as by-product.

Y uses K and X uses L as specific factors Specific factors assumption is done for analytical simplicity. Similar results emerge when both inputs are allowed to be mobile across both sectors. K can be created and accumulated and is internationally mobile. L is internationally immobile and also cannot be accumulated example: land. Y is treated as the enumerative good. The production functions are decreasing returns to scale in the specific factor.

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The production function can also be interpreted as constant returns where a sectorally mobile third input labour or entrepreneurship has not been explicitly modelled. Y emits more pollution per unit of production relative to X. Pollution emission can be abated if some resources are diverted for this purpose. Under some specific functional forms of this abatement technology, the production and abatement relations may be combined so that pollution appears like an input for production. However, it is to be kept in mind that higher pollution is associated with a higher production level because fewer resources are diverted for abatement of the pollution.

According to this interpretation of production and emissions, production technology is fixed and the input mix changes with changing price of the inputs. Stokey , provides an alternate explanation for the production process where technology can be interpreted to be changing. All the information for the spectrum of cleanest to dirtiest technology is available.

Z [0,1] is the index of the technology actually adopted in an economy depending on the prevailing incentives. Higher values of Z indicates that a dirtier technology is adopted which yields more goods but also more pollution. As there is no uncertainty, the emissions tax for next period is taken into account when making input decisions for the next period. If is the prevailing emissions tax, then profit maximizing leads to. Using this condition to substitute for in the production function makes production a function of and relative prices.

Given the prevailing market incentives, there is efficient allocation of resources in every period both for consumption and production. However, investment motives cause the sequence of static equilibrium to evolve and move towards the steady state, where there is no further desire for change. Comparison of the evolution towards the relevant steady states provides interesting insights about the environmental degradation outcomes. Under free trade, both goods X and Y are traded. Capital K t accumulates over time without any depreciation and is internationally mobile.

The second equation 3. Besides that, there is no significance evidence to prove that growth rate last period of FDI, import and export does not affect current GDP. This paper also found that Malaysian economic growth strong domestically and not much depends on globally inflow. This is supported by the plenty of resources such as oil palm, cruel oil, rubber and other comparative advantage product.

Beside that Malaysia economic can conclude as strong sustainability in term of economics. We also can look at U. S financial rescission and Greece debt financial crisis where most of country aware but Malaysia one of country that not effected much. The results shows that when Government of Malaysia implements fiscal policy by changing the amount of export or through spending for FDI facilities in order to encourage more investment inflow to Malaysia, the economic growth will not change thereby ensuring that no effects of fiscal policy are used to change the growth rate in Malaysia.

Hence Government of Malaysia needs to find other strategy in order to increase economic growth. Last but not least, by realize the importance instrument that most significant effect toward economy growth, government able to reacts through implement efficient policy to measure economics growth stable and maintains. Nevertheless government should able identify the policy that will lead to long-run economics growth without neglect the short-run economic growth.

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International Trade and Economic Development -- Introduction and Overview -- Development Economics

Journal of International Economics, 71 2 , Cointegration test. Error t-Statistic Prob.

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