Whilst the pollution haven hypothesis is intuitively attractive it is also fairly obvious (intuitively) why little evidence would be expected. This is how we argued the case in our 2003 JEEM paper which I still think some PHH papers are missing.
This paper argues that pollution intensive sectors may be subject to opposing sources of comparative advantage if we consider comparative advantage to be a function of a country’s endowment of capital, labor and pollution (the environment). On the one hand, the pure environmental regulation effect (ERE) would see the composition effect determined by the relative stringency of environmental regulations. The ERE implies that a country with a lower than average level of environmental regulations will have a comparative advantage in pollution intensive production. Since there is a high correlation between a country’s per capita income level and the stringency of its environmental regulations (see Dasgupta et al. 1995), the pure ERE implies that developing countries or regions (the South) will become pollution havens, whilst the developed world (the North) will specialize in clean production. In contrast, the pure capital-labor effect (KLE) would see the composition effect determined by relative capital and labor endowments. That the North is more capital-abundant than the South is well documented. What is less well understood is that there is also a high correlation between a sector’s capital intensity and its pollution intensity. Therefore, in the presence of trade liberalization, the KLE would result in the North increasing its specialization in capital intensive, and therefore pollution intensive, production whilst the South would specialize in relatively cleaner, labor-intensive production. This is the opposite effect to that stemming from the ERE.
It is good news that further methodological developments are taking place and I think the spatial aspects of this problem have been overlooked until recently. Here are two such papers:
The Pollution Haven Hypothesis: A Geographic Economy Model in a Comparative Study
Sonia Ben Kheder
Université Paris I Panthéon-Sorbonne
Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne
September 11, 2008
FEEM Working Paper No. 73.2008
Although based on theoretical foundations, the pollution haven hypothesis has never been clearly proven empirically. In this study, we re-examine this hypothesis by a fresh take on both its theoretical and empirical aspects. While applying a geographic economy model on French firm-level data, we confirm the hypothesis for the global sample. Through sensitivity analysis, we validate it for Central and Eastern European countries, emerging and high-income OECD countries, but not for the major part of the Commonwealth of Independent States countries. Finally, we show that the pollution haven hypothesis is confirmed in the strongest manner for emerging economies.
Keywords: FDI, Environmental Regulation, Economic Geography, Pollution Haven Hypothesis
JEL Classifications: F12, F18, Q28
Working Paper Series
Does Lax Environmental Regulation Attract FDI when accounting for "third-country" effects?[PDF]
Kukenova, Madina and Monteiro, Jose-Antonio (2008): Does Lax Environmental Regulation Attract FDI when accounting for "third-country" effects? Unpublished.
This paper investigates if differences in environmental regulations can influence FDI flows in a multi-country setting taking into account the so-called "third-country" effects. We examine bilateral FDI flows using a new extended OECD investment database which covers great number of host countries and a long sample period (1981-2005). The findings based on a spatial gravity-like model are largely plausible across specifications and confirm the existence of a negative relationship between FDI and environmental stringency, once we correct for endogeneity and spatial dependence. The evidence of a positive "third-country" effect for FDI suggests the prevalence of complex FDI from developed to developing countries. The spatial structure of the model allows also to underline the possible existence of competition in environmental standards between countries to attract FDI.